FINA 410 CH10

which of the following statements is incorrect
a.
A stock is a certificate representing partial ownership in a corporation.
b.
Like debt securities, common stock is issued by firms to obtain funds.
c.
Stocks are issued by corporations to raise short-term

c.
stocks are issued by corporations to raise short-term funds

preferred shareholders

may not receive a dividend every year

from a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds

true

a ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock

cumulative provision

firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy

less; can

when a corporation first decides to issue stock to the public, it engages in an

initial public offering

a firm can best avoid the time lag between registering new securities with the SEC and actually selling them by

shelf-registration

the process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible _____ prices is referred to as _____

offer; book building

to the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves

True

the transaction costs to the issuing firm in an IPO is usually ___ percent of the funds raised

7%

if many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price

downward pressure

the purpose of a lockup provision is to

prevent downward pressure on the stock's price

when the lockup period expires, the share price commonly

decreases significantly

IPOs tend to occur more primarily during recessions

false

the initial (one-day) return of IPOs in the US have averaged about _____ percent over the last 30 years

20%

the practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called

flipping

_____ occurs when a securities firm allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank

spinning

when brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as

laddering

on average, IPOs of firms tend to perform ____ over a period of years or longer

poorly

a firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC

false

a firm will typically attempt to sell shares from a secondary offering

at the prevailing market price

buy and sell orders on the OTC market are completed by

a telecommunications network

an ____ is a certificate which represents ownership of a foreign stock

ADR

the first-time issuance of shares by a specific firm tot he public is referred to as an

initial public offering (IPO)

a new stock issuance by a specific firm that already has stock outstanding is referred to as an

secondary stock offering

managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is _____ by the market, or a secondary stock offering when they believe their stock is ______ by the market

undervalued; overvalued

the largest organized exchange, listing the largest firms, is the

new york stock exchange

_____ are employed by the brokerage firms and execute orders for clients on the floor of the NYSE

independent brokers

the OTC market does not have a trading floor

true

firms listed as "pink sheets" on the OTC market

none of the above

the prevailing price per share divided by the firm's earnings per share is known as the

price-earnings ratio

the ____ is a value-weighted average of stock prices of 30 large U.S firms

dow jones industrial average

the _____ is a value-weighted index of stock prices of 500 large U.S firms

Standard and Poor's 500

sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ undervalued at its prevailing price

undervalued

analysts periodically communicate with high-level managers of the firms whose stock they rate

true

shareholders can most easily measure a firm's performance by monitoring changes in its _____ overtime

share price

which of the following is NOT true regarding the SOX act?

it allows public accounting firms to offer non-audit consulting services to an audit client whether the client's audit committee pre-approves the non-audit services or not

an example of shareholder activism is
a.
communication with the firm.
b.
engaging in a proxy contest.
c.
filing a lawsuit against the board.
d.
all of the above

all of the above

_____ are acquisitions that require substantial amounts of borrowed funds

leveraged buyouts

_____ are not barriers to corporate control to eliminate agency problems

leveraged buyouts

listing stock on a foreign stock exchange
a.
enhances the stock's liquidity.
b.
may increase the firm's perceived financial standing.
c.
may protect a firm against hostile takeovers.
d.
all of the above

all of the above

american depository receipts (ADRs) are similar to

stocks

_____ are portfolios of international stocks created and managed by various financial institutions

international mutual funds

______ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers

international mutual funds

when a firm buys some of its shares that it had previously issued, this is referred to as _____

stock repurchase

whenever _____, the stock price will be driven up

demand exceeds supply

which of the following is not a form of shareholder activisim?

poison pills

initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets

false

initial public offerings (IPOs) perform _____ on the day following the IPO and _____ for periods of a year or longer after the IPO

well;poorly

which of the following is not a part of the over-the-counter market?

the new york stock exchange

if the secondary market is inactive, then the shares would be illiquid

true

private firms that need a large equity investment but are not yet in position to go public may attempt to obtain funding from a venture capital (VC) fund

true

venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less

false

venture capital (VC) funds commonly serve as advisors to the businesses in which they invest

true

venture capital (VC) funds usually invest in publicly-traded businesses

false

venture capital (VC) funds typically plan to exit from their original investment within a period of about one year

false

the phrase "leaving money on the table" refers to investors who pa more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date

false

underwriters sell most or all of the shares of an IPO to institutional investors

true

the total cost of engaging in an IPO is usually about 1% of the total proceeds

false

since the SOX act of 2002, the initial returns resulting from an IPO have been smaller

true

in general, secondary offerings cause an immediate increase in the market price of the stock

false

electronic stock exchanges that execute stock transactions electronically are referred to as electronic communications networks (ECNs)

true

as a result of SOX, the firms were able to reduce their costs of compiling and reporting financial information

false

as a result of SOX, there was a reduced likelihood of fraudulent financial reporting by firms

true

the legal protection of shareholders varies substantially among countires

true

common law countries such as the US, canada, and the UK allow for more legal protection than civil law countries such as france or italy

true

the gov't enforcement of securities laws varies among countries

true

the laws of the financial information that must be provided by public companies is similar among all developed countries

false

ECNs are passive funds that track a specific index

false

a venture capital fund typically plans to exit from its original investment within about 4-7 years

true

VC funds typically take over businesses and manage them

false

normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the BOD

false

if investors become dissatisfied with a firms, performance, they can compete with mgmt in soliciting proxy votes in what is known as a proxy fight

true

IPOs tend to occur more frequently during bullish stock markets

true

according to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time

true

shelf-registration allows firms to quick access to funds without repeatedly being slowed by the registration process

true

in addition to the Nasdaq market, the OTC market has another segment known as "pink sheets", where smaller stocks are traded

true

the dow jones industrial average (DJIA) is value-weighted average of stock prices of 30 large U.S firms

true

research studies have found that the share prices of target firms and of acquiring firms react very positively to announcements of an acquisition

false

if managers believe that their firm's stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding

true

international exchange-traded funds (ETFs) represent international indexes that reflect composites of stocks for particular countries; shares of the index can be purchased or sold, thereby allowing investors to invest directly in a stock index representin

true

which of the following is not true with respect to VC funds?

one common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering

the owners of common stock are permitted to vote on the
a.
election of the board of directors.
b.
authorization to issue new shares of common stock.
c.
approval of amendments to the corporate charter.
d.
adoption of bylaws.
e.
all of the above

all of the above

which of the following is not true with respect to preferred stock?

if the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy.

which of the following is false with respect to IPOs?

owners of firms that engage in IPOs are normally required to retain their shares for at least 3 years before selling them in the secondary market.

to discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a _____ period of time

more;long

there is strong evidence that IPOs of firms perform _____ on average over a period of a year or longer

poorly

firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively

high

pink sheets" are traded on the

over-the-counter market

which of the following is not a provision specified in the SOX act?

it requires that only inside board members of a firm be on the firm's audit committee

which of the following is not a form of shareholder activism?

anti-takeover amendments

which of the following is not a barrier to corporate control?

proxy contests