Canadian Securities Course (CSC) Practice Exam 2025 – The Comprehensive All-in-One Guide to Exam Success!

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What does the "Greenshoe option" provide for underwriters in an IPO?

The ability to issue more of the underlying firm's stock

The Greenshoe option, also known as a shoe or overallotment option, is a provision that allows underwriters in an initial public offering (IPO) to issue more shares than originally planned if the demand for the stock exceeds expectations. This option is crucial for underwriters because it enables them to stabilize the stock’s price in the aftermarket and satisfy excess demand.

When investors show overwhelming interest in an IPO and the shares are oversubscribed, the underwriters can exercise the Greenshoe option to sell additional shares, up to a specified percentage of the original offering. This flexibility helps in managing market volatility and enhances the overall success of the IPO. It can also provide companies with greater capital than they would have obtained with the initial offering alone.

Thus, the correct answer highlights the ability of underwriters to respond to market conditions through the issuance of more stock, which is a key aspect of the Greenshoe option.

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The right to reject the firm's stock

The opportunity to buy back the firm's stock

The option to sell the firm's stock at a higher price

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