Chapter 3 Practice Question Answers
- 1. Answer: C. Any issuer or an affiliate of the issuer that is taking itself private (as opposed to being taken private through an acquisition by a private equity firm or other outsider) must file a Schedule 13E-3. Any person making a tender offer must file a Schedule TO. Therefore, both II and III are required filings in these circumstances. Schedule 14D-9 (option I) is only required if the person making a tender offer is a third party, which is not the case here. Schedule SR (option IV) is not an SEC form.
- 2. Answer: A. Value investors are looking for stocks they believe to be underpriced by the market. Such a stock will have a low P/E ratio. Reliable payment of dividends B is a focus of income investors. Growth and aggressive growth investors seek very high rates of return C. Answer choice D describes a stock that would appeal to a GARP (growth at a reasonable price) investor.
- 3. Answer: C. Taking a short position in a security involves borrowing shares of the security, then selling the shares. Since there is no need to make an initial purchase of shares to take a short position, option II is incorrect. At some point, the investor “covers” the short by buying shares to repay those that were previously sold. The investor usually does not have to cover on a specific date, but may do so at any time before the date specified in the contract. Therefore, option III is technically incorrect. When the investor covers the short, the investor’s profit (or loss) from the transaction is the difference in the share price between the time of sale and the time of covering. However, if the investor does profit, the net profit is the difference between the share prices less the cost of borrowing the shares. So option IV is incorrect. Taking a short position may indeed be used as a strategy to protect gains in the long position in the same security. We don’t know why the investor took a short position, but he could hav