FI 301- Ch. 10

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

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

d) may not receive a dividend every year

Preferred shareholders:
A) typically have the same voting rights as common shareholders.
B) do not share the ownership of the firm with common shareholders.
C) typically participate in the profits of the firm beyond the stated fixed annual dividend.
D) ma

c) cumulative provision

A _______ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock.
A) residual claim
B) preferred margin
C) cumulative provision
D) liquidation claim

b) less; can

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.
A) more; can
B) less; can
C) more; cannot
D) less; cannot

b) initial public

When a corporation first decides to issue stock to the public, it engages in a(n) _______ offering.
A) secondary
B) initial public
C) seasoned equity
D) none of these

b) shelf-registration

A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by:
A) use of proxy.
B) shelf registration.
C) use of a margin call.
D) use of preemptive rights.

c) offer; secondary market building

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 _______.
A) IPO; margin selling
B) offer; secondary market building
C) offer; bookbuilding

c) 7

The transaction costs to the issuing firm in an IPO is usually _______ percent of the funds raised.
A) 5
B) 6
C) 7
D) 25

b) downward

If investors quickly sell an IPO stock in the secondary market, there will be _______ pressure on the stock's price.
A) upward
B) downward
C) no additional
D) none of these

b) prevent downward pressure on the stock's price

The purpose of a lockup provision is to:
A) keep individual investors from buying and selling stock.
B) prevent downward pressure on the stock's price.
C) increase the number of outstanding shares.
D) allocate a larger proportion of stock to institutional

c) decreases significantly

When the lockup period expires, the share price commonly:
A) remains unchanged.
B) increases significantly.
C) decreases significantly.
D) does none of these.

b) 20

The initial (one-day) return of IPOs in the United States has averaged about _______ percent over the last 30 years.
A) 10
B) 20
C) 30
D) 50

a) flipping

The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called:
A) flipping.
B) skiing.
C) flopping.
D) none of these.

b) spinning

_______ occurs when an investment bank allocates shares from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank.
A) Flipping
B) Spinning
C) Laddering
D) None of these

c) laddering

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:
A) flipping.
B) spinning.
C) laddering.
D) none of these.

b) poorly

On average, IPOs of firms tend to perform _______ over a period of a year or longer.
A) well
B) poorly
C) better than the S&P 500 index
D) none of these

c) at the prevailing market price

A firm will typically attempt to sell shares from a secondary offering:
A) below the prevailing market price.
B) above the prevailing market price.
C) at the prevailing market price.
D) at the offer price of the IPO.

d) a telecommunications network

Buy and sell orders on the OTC market are completed by:
A) auction on the trading floor.
B) sealed competitive bids.
C) noncompetitive bids.
D) a telecommunications network.

a) ARD

A(n) _______ is a certificate which represents owner´┐Żship of a foreign stock.
A) ADR
B) SEAQ
C) NASDAQ
D) AMEX

d) initial public offering (IPO)

The first-time issuance of shares by a specific firm to the public is referred to as a(n):
A) stock repurchase.
B) secondary stock offering.
C) initial rights issue.
D) initial public offering (IPO).

b) secondary stock offering

A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n):
A) stock repurchase.
B) secondary stock offering.
C) initial rights issue.
D) initial public offering (IPO).

c) undervalued; overvalued

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.
A) undervalued; undervalued
B) overv

a) New York

The largest organized exchange, listing the largest firms, is the _______ Stock Exchange.
A) New York
B) American
C) Midwest
D) Pacific Stock

c) independent brokers

_______ are employed by brokerage houses and execute orders for clients on the floor of the NYSE.
A) Specialists
B) Commission brokers
C) Independent brokers
D) Dealers

d) none of these

Firms listed as "pink sheets" on the OTC market:
A) are typically very large.
B) satisfy NASDAQ's listing requirements.
C) are typically owned by various institutional and individual investors.
D) none of these.

b) price-earnings ratio

The prevailing price per share divided by the firm's earnings per share is known as the:
A) dividend yield.
B) price-earnings ratio.
C) fully diluted earnings per share.
D) annual dividend.

a) Dow Jones Industrial Average

The _______ is a price-weighted average of stock prices of 30 large U.S. firms.
A) Dow Jones Industrial Average
B) Standard and Poor's 500
C) New York Stock Exchange Index
D) NASDAQ

b) Standard and Poor's 500

The _______ is a value-weighted index of stock prices of 500 large U.S. firms.
A) Dow Jones Industrial Average
B) Standard and Poor's 500
C) New York Stock Exchange Index
D) NASDAQ

d) undervalued

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is _______ at its prevailing price.
A) overvalued
B) fixed
C) appropriate
D) undervalued

b) monitor changes in firm value over time

The easiest way for shareholders to monitor the firm is to:
A) call management on a weekly basis.
B) monitor changes in firm value over time.
C) attend the annual shareholders' meeting.
D) read the annual report.

a) share price

Shareholders can most easily measure a firm's performance by monitoring changes in its _______ over time.
A) share price
B) employee job descriptions
C) board of directors
D) asset size

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

Which of the following is not true regarding the Sarbanes-Oxley Act?
A) It attempts to force accountants to conform to regular accounting standards in preparing a firm's financial statements.
B) It requires that only outside board members of a firm be on

d) all of these are examples of shareholder activism

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 these are examples of shareholder activism.

c) leveraged buyouts

_______ are acquisitions that require substantial amounts of borrowed funds.
A) Stock repurchases
B) Corporate controls
C) Leveraged buyouts
D) Stock splits

a) leveraged buyouts

_______ are not barriers to corporate control to eliminate agency problems.
A) Leveraged buyouts
B) Antitakeover amendments
C) Poison pills
D) Golden parachutes

d) does all of these

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) does all of these.

c) stocks

American Depository Receipts (ADRs) are similar to:
A) stock options.
B) bank deposits.
C) stocks.
D) bonds.

a) international mutual funds

_______ are portfolios of international stocks created and managed by various financial institutions.
A) International mutual funds
B) American Depository Receipts (ADRs)
C) World Equity Benchmark Shares
D) Initial public offerings (IPOs)

a) international mutual funds

_______ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers.
A) International mutual funds
B) American Depository Receipts (ADRs)
C) World Equity Depository Receipts
D) In

d) none of these

When a firm buys some of its shares that it had previously issued, this is referred to as a:
A) reverse IPO.
B) leveraged buyout.
C) ladder spin.
D) none of these.

c) demand; supply; up

Whenever _______ exceeds _______, the stock price will be driven _______.
A) supply; demand; up
B) demand; supply; down
C) demand; supply; up
D) none of these

b) poison pills

Which of the following is not a form of shareholder activism?
A) investors communicating their concerns to other investors in an effort to place more pressure on the firm's managers or its board members
B) poison pills
C) shareholder lawsuits
D) All of th

a) well; poorly

Initial public offerings (IPOs) perform _______ on the day following the IPO and _______ for periods of a year or longer after the IPO.
A) well; poorly
B) poorly; well
C) well; well
D) poorly; poorly

d) yellow sheets

Which of the following is not a part of the over-the-counter market?
A) the NASDAQ National Market
B) the NASDAQ Small Cap Market
C) the OTC Bulletin Board
D) yellow sheets
E) All of these are part of the over-the-counter market.

c) 7.44

A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is _______ percent.
A) .74
B) 1.34
C) 7.44
D) 1.14

a) true

From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
A) true
B) false

a) true

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 lower than it deserves.
A) true
B) false

b) false

IPOs tend to occur more primarily during recessions.
A) true
B) false

b) false

A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC.
A) true
B) false

a) true

Unlike the organized exchanges, the OTC market does not have a trading floor.
A) true
B) false

b) false

Initial public offerings (IPOs) tend to occur more frequently during bearish stock markets.
A) true
B) false

a) true

If the secondary market is inactive, then the shares would be illiquid.
A) true
B) false

a) true

Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund.
A) true
B) false

b) false

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.
A) true
B) false

a) true

Venture capital (VC) funds commonly serve as advisors to the businesses in which they invest.
A) true
B) false

b) false

Venture capital (VC) funds usually invest in publicly traded businesses.
A) true
B) false

b) false

Venture capital (VC) funds typically plan to exit from their original investment within a period of about one year.
A) true
B) false

b) false

The phrase "leaving money on the table" refers to investors who pay 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.
A) true
B) false

a) true

Underwriters sell most of the shares of an IPO to institutional investors.
A) true
B) false

b) false

The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.
A) true
B) false

a) true

Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been smaller.
A) true
B) false

b) false

In general, secondary offerings cause an immediate increase in the market price of the stock.
A) true
B) false

a) true

Electronic stock exchanges that execute stock transactions electronically are referred to as electronic communications networks (ECNs).
A) true
B) false

b) false

As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information.
A) true
B) false

a) true

As a result of the Sarbanes-Oxley Act, there was a reduced likelihood of fraudulent financial reporting by firms.
A) true
B) false

a) true

The legal protection of shareholders varies substantially among countries.
A) true
B) false

a) true

Common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than civil law countries such as France or Italy.
A) true
B) false

a) true

The government enforcement of securities laws varies among countries.
A) true
B) false

b) false

The laws of the financial information that must be provided by public companies is similar among all developed countries.
A) true
B) false

b) false

Electronic communications networks (ECNs) are passive funds that track a specific index.
A) true
B) false

a) true

The net asset value of an international ETF is determined by translating the foreign currency value of the foreign securities into dollars.
A) true
B) false