Finance Exam ch5 - ch6

Which of the following has a neutral impact on a corporation's stock price?

Borrowing money

What is the market for securities with a term longer than one year?

Capital market

For a corporation, preferred stockholders must be paid dividends before coupon payments are paid to its bondholders.

False - In a liquidation, all the corporation debt (including bonds) must be repaid before equity.

Investment banks underwrite stocks with a maturity date of less than five years.

False - Stock has no maturity date.

A bond is a long-term financial instrument.

True

A company may have the distress costs of an impending bankruptcy without ever going bankrupt.

True

A marketable security has a forum for exchange where the seller can trade a security with no penalty.

True

What is the market for securities with a term up to one year?

Money market

An exception that may call for a company with both high operating leverage and financial leverage is a manufacturing company where it can use the machinery as collateral for its loans.

True

Bonds are a liability for the issuer.

True

Due to low interest rates, many US corporations have been borrowing money and buying back its stock, resulting in higher market stock prices.

True

If a company borrows money, the term of the financing should be roughly equal to the timeframe of its intended use of the financing.

True

If a corporation' s Net Income stays constant year over year, Return on Equity would increase by the corporation increasing the Debt to Equity Ratio for the same period.

True

Preferred stock is a hybrid security since it has features of equity as well as debt securities.

True

Shareholders' Equity is the amount of net worth a business has after potentially liquidating the assets to pay off the liabilities.

True

The interest rate charged on debt is commensurate with the risk of the financing.

True

Thousands of bonds are traded on the New York Stock Exchange.

True

The investment bank that helps a corporation issue 2 million shares of stock with a spread of $2 per share and sells all the issued shares would earn a fee of:

$4 million

The tradeoff with a company using operating leverage is to increase risk while potentially increasing:

profit.

The distress cost of vendors not shipping inventory to company may lead to an additional distress cost of:

reduced sales.

Common stock is a ___________________ in the corporation it is issued by.

residual interest

A company using operating leverage adds to its:

risk.

Most companies would not have high operating leverage and high financial leverage because that would be too much:

risk.

A company using operating leverage may decrease the variable costs of overtimes wages by investing in:

robotics

Market Signaling Theory disagrees with issuing stock being the cause of diluted earnings because:

the additonal financing should provide the opportunity to increase earnings.

When an investment bank advises a corporate client that issues new shares to price them at a price lower than the market price of its already-issued shares, this practice is called:

underpricing

The major exchanges do not permit equity holders to sell stock of any public corporation.

False

A corporation issuing a bond that is rated investment grade by Standard and Poor would be have a rating of:

BBB and above

Increased market share is an example of a distress or indirect cost for a company under the threat of bankruptcy.

False

Which type of liability does not bear interest?

Accounts payable

What is the form of interest a bond investor should receive?

Coupon payments

Which type of financial obligation must have a maturity date?

Debt

Which type of financing has more risk for the corporation that uses it as a source of financing?

Debt financing

What are the parties in the financial marketplace who need money or financing?

Deficit units

Which of the following is a share of the earnings a stock investor may receive for a period?

Dividends

Which of the following is not a legal obligation for a corporation to pay?

Dividends for common shareholders based on Net Income

Which security is a share of ownership in a business?

Equity

A share of stock must have a maturity date.

False

According to Market Signaling Theory, a corporation should never go public.

False

All bonds at bearer bonds.

False

All debt financing has the same interest rate.

False

Any financing decision a corporation makes affects its stock price the same way.

False

Startup businesses would not get financing from which of the following:

Initial public offering

Which of the following is deducted on an income statement before calculating Earnings Before Tax?

Interest expense

Which type of financing option offers a corporation a "tax shield?"

Interest-bearing debt

Which institution underwrites stock issues and enables a corporation to issue and sell its stock in the financial marketplace?

Investment bank

What human resources expenditure below would require long-term or capital financing?

New candidate assessment center

Which type of institution becomes a managing partner in businesses that are in trouble and considered by it to not be managed well.

Private equity

Which of the following accounts belongs in the Shareholder's Equity section of the balance sheet?

Retained Earnings

Which of the following is a rating agency for bond issues?

Standard and Poor

What are the parties in the financial marketplace who have money to invest and provide financing for other parties?

Surplus units

According to market signaling theory, a company borrowing money sends what message to the financial marketplace?

The company is confident it can repay the financing.

Which institution invests in startup businesses that show promise?

Venture capital

A company using operating leverage may decrease external training seminar fees and:

build its own training facility.

A mature public corporation borrowing money on a short- or long-term basis would go to a:

commercial bank.

According to Market Signaling Theory, a corporation that issues more stock should expect its market stock price to:

decline

Operating leverage involves replacing some variable costs with:

fixed costs.

According to Market Signaling Theory, a corporation that buys back its stock should expect its market stock price to:

increase.

According to Market Signaling Theory, a corporation that buys back its stock sends a message to the markets that:

it is confident about its future.