Study Question of the Week: January 16, 2014 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 24, Series 62, and Series 79. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Study ? of the Week

Question (Relevant to the Series 7, Series 24, Series 62, and Series 79)

What IPO method will offer the underwriter a green shoe option?

Answers:

A. Best efforts

B. Mini-max

C. Firm commitment

D. Bought deal

Correct Answer: C. Firm commitment

Rationale: A firm commitment underwriting is an agreement that the underwriter will purchase all the securities at a discount and then sell the securities to the public at a fixed public offering price. In this type of agreement, the underwriter is responsible for the marketing and sale of the securities and assumes all the risk of the offering, including the liability of any unsold shares. An over-allotment option, also called a green shoe option, gives the syndicate the right to require the issuing company to issue up to 15% more shares in the offering at the syndicate’s discretion. Green shoe options are offered on firm commitment underwritings only.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.