Which of the following statements is correct? A. In a best-efforts IPO, the unde

Question

Which of the following statements is correct?

A. In a best-efforts IPO, the underwriter guarantees that all stock will be sold.

B. The main advantages for a firm in going public are greater liquidity, better access to capital, and greater ability of investors to monitor the management of the firm.

C. A cash offer differs from a rights offer in that in the latter shares are offered to both existing shareholders and investors at large.

D. The announcement of an SEO usually raises a stock's price.

E. The firm commitment process is the most common practice for IPOs.

Explanation / Answer

A. In a best-efforts IPO, the underwriter does not guarantee that all stock will be sold. The underwriter promises to make a full-fledged attempt to sell as much of an IPO as possible to the public. So, the given statement is incorrect.

B. The main advantages for a firm going public can be greater liquidity and better access to capital but not greater ability of investors to monitor the management of the firm. By going public, you can undermine their ability to monitor the management of the firm. So, the given statement is incorrect.

C. In a rights issue, the rights to buy additional shares of the company are given to existing shareholders' only. Therefore, the given statement is incorrect.

D. The announcement of an SEO may or may not increase share price. So, this statement is incorrect.

E. This statement is Correct. In a firm commitment, underwriters act dealers and are responsible for any unsold inventory. This is the most common practice for IPOs.

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