Chapter 15 Discussion Questions 15-1 In what way is an investment banker a risk taker? The investment banker is a risk taker(underwriter) in that the investment banking house agrees to buy the securities from the corporation and resell them to other security dealers and the public What is the purpose of market stabilization activities during the distribution Market stabilization activities are managed in an attempt to insure that the market price will not fall below a desired level during the distribution process Synd icate members committed to purchasing the stock at a given level could be in trouble if there is a rapid decline in the price of the stock 15-3 Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process By forming a syndicate of many underwriters rather than just one, the overall risk is diffused and the capabilities for widespread distribution are enhanced. A syndicate may comprise as few as two or as many as 50 investment banking he louses 15-4 Discuss the reason for the differences between underwriting spreads for stock and bonds Common stocks often carry a larger underwriting spread than bonds because the market reaction to stocks is more uncertain 15-5 Explain how the price of a new security issue is determined The price is determined by the firms industry, its financial characteristics, and the firms anticipated earnings and divided pay ing capability. Based on appropriate valuation techniques, a price will be tentatively assigned and will be compared to that enjoyed by similar firms in a given industry. If the industry's price-earnings ratio is 12, the firm should not stray too far from the norm. Anticipated public demand will also be a major factor in pricing a new CopyrightC 2005 by The McGray-Hill Companies, Inc. S-524Copyright © 2005 by The McGraw-Hill Companies, Inc. S-524 Chapter 15 Discussion Questions 15-1. In what way is an investment banker a risk taker? The investment banker is a risk taker (underwriter) in that the investment banking house agrees to buy the securities from the corporation and resell them to other security dealers and the public. 15-2. What is the purpose of market stabilization activities during the distribution process? Market stabilization activities are managed in an attempt to insure that the market price will not fall below a desired level during the distribution process. Syndicate members committed to purchasing the stock at a given level could be in trouble if there is a rapid decline in the price of the stock. 15-3. Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process. By forming a syndicate of many underwriters rather than just one, the overall risk is diffused and the capabilities for widespread distribution are enhanced. A syndicate may comprise as few as two or as many as 50 investment banking houses. 15-4. Discuss the reason for the differences between underwriting spreads for stocks and bonds. Common stocks often carry a larger underwriting spread than bonds because the market reaction to stocks is more uncertain. 15-5. Explain how the price of a new security issue is determined. The price is determined by the firm's industry, its financial characteristics, and the firm's anticipated earnings and divided-paying capability. Based on appropriate valuation techniques, a price will be tentatively assigned and will be compared to that enjoyed by similar firms in a given industry. If the industry's price-earnings ratio is 12, the firm should not stray too far from the norm. Anticipated public demand will also be a major factor in pricing a new issue