FIN 3080 EXAM 2 QUESTIONS AND
ANSWERS ALL CORRECT
Maverick's Motorcycles conducts an initial public offering (IPO) and sells 150 million
shares. Of those shares, 100 million are primary shares and 50 million are secondary
shares. The offer price is $24 per share and the firm pays its investment banker a 7%
fee. How much cash will go Maverick's Motorcycles (the firm itself) as a result of the
IPO?
a. $2.400 billion
b. $2.232 billion
c. $3.312 billion
d. $2.784 billion - Answer- b. $2.232 billion
Select the incorrect statement about the Key Activity of Trading
a. Under the old model, brokers made money by selling clients' order flow
b. Under the new model, brokers make money by recommending in-house products
c. Under the old model, brokers earned commissions from executing trades
d. Under the new model, brokers do not earn commissions from executing trades -
Answer- a. Under the old model, brokers made money by selling clients' order flow
On the first day of trading, Facebook's stock had a return of 0.6%. How does this
compare to the average first day return of firms that go public?
a. It is much lower than the average of 42%
b. It is about the same as the average of 0.9%
c. It is much higher than the average of −4.5%
d. It is much lower than the average of 18% - Answer- d. It is much lower than the
average of 18%
Which activity typically earns investment banks the highest fee?
a. Capital Raising- IPOs
b. Capital Raising- Corporate Debt
c. Asset Management
d. Advising- Mergers - Answer- a. Capital Raising- IPOs
How do investment banks make money when they are acting as market makers?
,a. Fee based on deal volume
b. Commissions
c. Bid-ask spread
d. Changes in prices of securities - Answer- c. Bid-ask spread
Select the correct statement regarding changes among brokers.
a. Due to increased volumes in trading activities, firms have increased brokerage fees
over the years
b. Mergers occurred where firms with multiple revenue streams bought firms that rely
more on brokerage fees
c. Firms that focused on only brokerage fees (TD Ameritrade and E*Trade) have
performed well financially in recent years
d. Charles Schwab purchased TD Ameritrade because it was able to charge high
brokerage commissions to clients - Answer- b. Mergers occurred where firms with
multiple revenue streams bought firms that rely more on brokerage fees
Viper Ltd. is a boutique investment bank located in California. The bank advises on
initial public offerings (IPOs) and charges a 7% fee. The most recent client issued 40
million shares at $8 per share. How much did Viper make off this transaction?
a. $22.4 million
b. $26.9 million
c. $32.0 million
d. $20.3 million - Answer- a. $22.4 million
During an initial public offering (IPO), firms often sell both "primary" and "secondary"
shares. Select the correct statement regarding secondary shares.
a. Financial institutions buy secondary shares in order to vote on important firm issues.
b. Secondary shares allow the firms early investors' (e.g., venture capitalists) and
employees to liquidate their investments.
c. Secondary shares are lower in price, which allows individuals to participate in the
IPO.
d. Secondary shares allow the firm to raise additional capital without giving up voting
rights to new investors. - Answer- b. Secondary shares allow the firms early investors'
(e.g., venture capitalists) and employees to liquidate their investments.
Before the financial crisis, the five major investment banks were Lehman Brothers, Bear
Stearns, Goldman Sachs, Morgan Stanley, and Merrill Lynch. What happened to the
five major investment banks as a result of the financial crisis?
a. All of the five major investment banks went bankrupt
b. One went bankrupt, two were acquired by commercial banks, and two converted to
commercial banks
c. Three survived and two went bankrupt
, d. Three went bankrupt and two were acquired by commercial banks - Answer- b. One
went bankrupt, two were acquired by commercial banks, and two converted to
commercial banks
Which Key Activity involves helping firms issue stock in an initial public offering?
a. Trading
b. Market Making
c. Advising
d. Raising Capital - Answer- d. Raising Capital
Which of the following steps in the IPO process occurs first?
a. Build a book of indications of interest
b. Organize road show
c. Set initial price range and shares to be issued
d. File a prospectus with the SEC - Answer- c. Set initial price range and shares to be
issued
Which type of financial institution is associated with very high pay for employees, but
also very long hours and a high level of stress?
a. Commercial Banks
b. Investment Banks
c. Mutual Funds
d. Insurance Companies - Answer- b. Investment Banks
Which is an example of a socially responsible investing strategy that implements
negative screening?
a. A mutual fund invests in 500 firms that are in the solar energy industry
b. A mutual fund invests in electric car manufacturers and battery manufacturers
c. A mutual fund invests in most S&P 1500 firms, except those in the oil and gas
industries
d. A mutual fund invests in all firms in the S&P 500, then encourages each of them to
reduce pollution - Answer- c. A mutual fund invests in most S&P 1500 firms, except
those in the oil and gas industries
A mutual fund charges an expense ratio of 0.75%, calculated as an average of the
beginning and ending values of the investment in the fund. Suppose that you invest
$10,000 into the fund and the fund has a gross return of 8% during the year. What is the
value of your investment at the end of the year? Suppose that the fund charges a 3%
front end load. Now, what is the value of your investment at the end of the year?
a. With no load, the investment is worth $10,587.58, with the load, it is worth $10,487.98
b. With no load, the investment is worth $10,722.00, with the load, it is worth $10,400.34
ANSWERS ALL CORRECT
Maverick's Motorcycles conducts an initial public offering (IPO) and sells 150 million
shares. Of those shares, 100 million are primary shares and 50 million are secondary
shares. The offer price is $24 per share and the firm pays its investment banker a 7%
fee. How much cash will go Maverick's Motorcycles (the firm itself) as a result of the
IPO?
a. $2.400 billion
b. $2.232 billion
c. $3.312 billion
d. $2.784 billion - Answer- b. $2.232 billion
Select the incorrect statement about the Key Activity of Trading
a. Under the old model, brokers made money by selling clients' order flow
b. Under the new model, brokers make money by recommending in-house products
c. Under the old model, brokers earned commissions from executing trades
d. Under the new model, brokers do not earn commissions from executing trades -
Answer- a. Under the old model, brokers made money by selling clients' order flow
On the first day of trading, Facebook's stock had a return of 0.6%. How does this
compare to the average first day return of firms that go public?
a. It is much lower than the average of 42%
b. It is about the same as the average of 0.9%
c. It is much higher than the average of −4.5%
d. It is much lower than the average of 18% - Answer- d. It is much lower than the
average of 18%
Which activity typically earns investment banks the highest fee?
a. Capital Raising- IPOs
b. Capital Raising- Corporate Debt
c. Asset Management
d. Advising- Mergers - Answer- a. Capital Raising- IPOs
How do investment banks make money when they are acting as market makers?
,a. Fee based on deal volume
b. Commissions
c. Bid-ask spread
d. Changes in prices of securities - Answer- c. Bid-ask spread
Select the correct statement regarding changes among brokers.
a. Due to increased volumes in trading activities, firms have increased brokerage fees
over the years
b. Mergers occurred where firms with multiple revenue streams bought firms that rely
more on brokerage fees
c. Firms that focused on only brokerage fees (TD Ameritrade and E*Trade) have
performed well financially in recent years
d. Charles Schwab purchased TD Ameritrade because it was able to charge high
brokerage commissions to clients - Answer- b. Mergers occurred where firms with
multiple revenue streams bought firms that rely more on brokerage fees
Viper Ltd. is a boutique investment bank located in California. The bank advises on
initial public offerings (IPOs) and charges a 7% fee. The most recent client issued 40
million shares at $8 per share. How much did Viper make off this transaction?
a. $22.4 million
b. $26.9 million
c. $32.0 million
d. $20.3 million - Answer- a. $22.4 million
During an initial public offering (IPO), firms often sell both "primary" and "secondary"
shares. Select the correct statement regarding secondary shares.
a. Financial institutions buy secondary shares in order to vote on important firm issues.
b. Secondary shares allow the firms early investors' (e.g., venture capitalists) and
employees to liquidate their investments.
c. Secondary shares are lower in price, which allows individuals to participate in the
IPO.
d. Secondary shares allow the firm to raise additional capital without giving up voting
rights to new investors. - Answer- b. Secondary shares allow the firms early investors'
(e.g., venture capitalists) and employees to liquidate their investments.
Before the financial crisis, the five major investment banks were Lehman Brothers, Bear
Stearns, Goldman Sachs, Morgan Stanley, and Merrill Lynch. What happened to the
five major investment banks as a result of the financial crisis?
a. All of the five major investment banks went bankrupt
b. One went bankrupt, two were acquired by commercial banks, and two converted to
commercial banks
c. Three survived and two went bankrupt
, d. Three went bankrupt and two were acquired by commercial banks - Answer- b. One
went bankrupt, two were acquired by commercial banks, and two converted to
commercial banks
Which Key Activity involves helping firms issue stock in an initial public offering?
a. Trading
b. Market Making
c. Advising
d. Raising Capital - Answer- d. Raising Capital
Which of the following steps in the IPO process occurs first?
a. Build a book of indications of interest
b. Organize road show
c. Set initial price range and shares to be issued
d. File a prospectus with the SEC - Answer- c. Set initial price range and shares to be
issued
Which type of financial institution is associated with very high pay for employees, but
also very long hours and a high level of stress?
a. Commercial Banks
b. Investment Banks
c. Mutual Funds
d. Insurance Companies - Answer- b. Investment Banks
Which is an example of a socially responsible investing strategy that implements
negative screening?
a. A mutual fund invests in 500 firms that are in the solar energy industry
b. A mutual fund invests in electric car manufacturers and battery manufacturers
c. A mutual fund invests in most S&P 1500 firms, except those in the oil and gas
industries
d. A mutual fund invests in all firms in the S&P 500, then encourages each of them to
reduce pollution - Answer- c. A mutual fund invests in most S&P 1500 firms, except
those in the oil and gas industries
A mutual fund charges an expense ratio of 0.75%, calculated as an average of the
beginning and ending values of the investment in the fund. Suppose that you invest
$10,000 into the fund and the fund has a gross return of 8% during the year. What is the
value of your investment at the end of the year? Suppose that the fund charges a 3%
front end load. Now, what is the value of your investment at the end of the year?
a. With no load, the investment is worth $10,587.58, with the load, it is worth $10,487.98
b. With no load, the investment is worth $10,722.00, with the load, it is worth $10,400.34
