Chapters 14-16 Smartbook

The times-interest-earned ratio is _____.

EBIT divided by interest expense

Money markets include securities with the following maturity:

1 year or less

Market stabilization usually occurs within _____ days of the offering.

30

A Eurobond is _____.

A bond denominated in a company's domestic currency but sold outside of the company's country

The ability of the firm to repurchase a bond is called ...

A call provision

Which of the following would be considered a lease transaction?

A company makes a monthly payment to rent a machine for 20 years

What is considered the "dark side" of technological advancements in global capital markets?

A financial crisis that occurs in one center spread quickly around the globe

Preferred stock is usually issued by companies that have which of the following characteristics?

A high debt to equity ratio Low prices for their common stock

Investment bankers often ____ clients on the types of securities to be sold and on the ____ of the sale.

Advise Time

A secondary offering occurs ____ an IPO, and often includes shareholder ____ and additional shares sold by the company.

After Blocks

Net investment costs associated with a bond refunding issue should be calculated on a/an ____ basis.

After-tax

The efficient market hypothesis assumes that:

All information available is factored into the stock price

Capital markets are a mechanism for _____ available capital to the most _____ user.

Allocating Efficient

Security markets exist to aid the _____ of capital among households, corporations, and government.

Allocation

A shelf registration _____.

Allows a firm to issue additional securities without SEC approval. Allows a firm to take advantage of market conditions as they develop.

After an IPO or secondary offering, a period of market stabilization occurs where ____.

An investment banker will purchase shares in the market to create a floor for the share price

The after-tax interest savings of a bond decision can usually be represented as a/an _____.

Annuity

A long-term, non-cancelable lease is identical to purchasing an ____ with ____ capital.

Asset Debt

If a bond is secured this means that specific ____ have been pledged to protect the ____ in case the company ____.

Assets Bondholders Defaults

ECNs have transformed security markets by _____.

Automatically matching buy and sell orders at a lower cost

Capital market securities include _____.

Bonds and common stock

A bond that can be repurchased from investors when interest rates drop below the bond's coupon rate is referred to as a _____ bond.

Callable

The underwriting spread _____.

Can be divided among the different participants in the distribution process. Is the difference between the price paid and the price received for the securities.

A higher times interest earned ratio indicates the company ...

Can meet its interest obligations as they become due

Households funnel savings to intermediaries who invest them in the ____ markets.

Capital

Internally generated funds are represented by which of the following? Choose any that apply.

Cashflow added back from depreciation Retained earnings

The Glass-Steagall Act forced financial institutions to separate ____ banking from investment banking activity.

Commercial

When acting as an underwriter, the investment banker provides a firm ____ to purchase the securities from the corporation thereby taking on the ____ associated with selling the securities to the public.

Commitment Risk

Which of the following would be considered a leveraged buyout?

Company management takes on considerable debt to buy back shares from existing shareholders.

The yield to maturity for an investor in a zero-coupon bonds it _____.

Constant because interest is not reinvestment

An investment banker will assist in the sale of large blocks of stock by existing shareholders because ____.

Conventional sales channels are not large enough to absorb the block of shares

The return to a purchaser of a zero-coupon bond is the difference between the investor's ____ and the ____ value of the bond.

Cost Face

Which of the following are basic components of a bond agreement?

Coupon rate Par value Maturity date

Technology has been a major factor in the growth of global capital markets because technology has _____.

Decreased the cost of transactions

The four advantages of having debt in the capital structure are the interest payments are tax ____, the financial obligation is clearly ____, inflation can lower the liability in real dollar terms, and the use of debt can reduce a company's cost of capital.

Deductible Specified

A firm's bond rating sheds light on its _____ risk.

Default

To calculate internally generated funds available for investment, we typically start with Net Income and add back _____.

Depreciation

Preferred stock is the least used financing option because the ____ is not tax deductible like interest, and companies that tend to issue it are near their maximum debt _____.

Dividend Limit

Which of the following are reasons that companies have increased their use of long-term debt for financing?

Expansion in Capital intensive industries. Inability to generate enough funds from operations to fund expansion. Recapitalize by using debt to repurchase common stock.

Where as US Treasury security has an ____ guarantee, federally sponsored agency debt has an ____ guarantee.

Explicit Implicit

Par value is the initial value of the bond, commonly known as the ____ value.

Face

True or False: A bond with a serial payment provision has a maximum of four different maturity dates.

False

True or False: A company seeking to go private can purchase its own shares, typically using equity financing.

False

True or False: Companies with higher credit ratings have higher yields than companies with lower credit ratings, all other factors equal.

False

True or False: Disclosure requirements are typically more demanding in the Eurobond market compared to those of the SEC in the U.S.

False

True or False: Fannie Mae and Sallie Mae are the two largest federally sponsored credit agencies.

False

True or False: Senior debt is considered higher risk than junior debt.

False

True or False: Service industries typically require higher debt than capital-intensive industries.

False

True or False: The European Capital markets have risen to become the largest in the world.

False

True or False: The investment banker is not concerned with the aftermarket of an offering, because they have already received their profit from the issuance.

False

True or False: The provisions of a lease obligation are often more restrictive than a bond indenture to a company.

False

True or False: Traditional exchanges have maintained their specialized status by avoiding affiliations with ECNs.

False

The investment banker will analyze a firm's industry, ____ characteristics, and anticipated ____ to determine a company's ____.

Financial Earnings Value

Capital markets provide a place for _____.

Firms to raise capital and for individuals to invest capital

The U.S. Treasury's management of the federal government's debt is part of its _____ policy.

Fiscal

The investment banker will buy and sell a newly distributed security in the open market ____.

For a limited period of time to ensure liquidity

Which of the following are advantages to being a public company?

Founders and early investors may be able to readily sell their shares. Public shares can be used as a currency in acquisitions. Reading capital from public markets is easier and less costly than from private markets.

Public companies have access to a ____ pool of investors to raise capital versus private companies.

Larger

Which of the following are typically net demanders of capital?

Government Corporations

Money markets deal with securities that ...

Have a life of one year or less

IPOs typically have ____ first day returns and secondary offerings typically occur after a stock has ____ in value.

High Risen

Regulatory costs for public companies are typically ____, and focus is placed on _____ term results.

Higher Short

A bond with a BBB rating has a ____ than a bond with an A rating.

Higher risk of default

The major supplier of funds for investment in the economy is typically the ____ sector.

Household

The primary offering of securities is commonly referred to as the ____, the secondary offering of securities may or may not include shareholders' ____ sales.

IPO Block

A times interest earned ratio of 5 states that _____.

Incomes before interest and taxes covers the interest obligation five times

The three disadvantages of including debt in the capital structure are the obligation is fixed and must be paid, the ____ agreement may put restrictions on the firm, and debt can ____ (increase/decrease) common stock values if utilized beyond a given point.

Indenture Decrease

Personal income that is saved and funneled to financial intermediaries is known as ____ investment.

Indirect

Markets are said to be efficient if prices reflect all publicly available _____.

Information

Which of the following are benefits of having debt in the capital structure?

Interest is tax-deductible The cost of capital for the firm may be reduced

A primary variable that influences the market for securities is _____ _____.

Interest rates

Variables that affect capital markets include _____.

Interest rates Investors' confidence Economic growth

The yield to maturity can also be thought of as a bond's _____.

Internal rate of return

Securities laws strive to protect unwary ____ from ____ and manipulation.

Investors Fraud

A bond with a serial payment provision _____.

Is gradually paid off in installments over a period of time

Earnings dilution from additional share issues ____.

Is temporary if the company is using the capital to invest in profitable opportunities

An initial public offering, IPO, is when a company:

Issues shared that are traded on a stock exchange

____ ____ involves the selling of securities directly to investors, rather than through the security markets.

Private placement

Which of the following are advantages of leasing an asset?

Leases may not have restrictive provisions as would a bond issue. Leases often do not require a down payment. The lessor may be able to offer benefits beyond the lease of the asset.

Corporations benefit from _____ security markets because they can raise funds rapidly at fair, competitive prices.

Liquid

Different exchanges have ____ requirements that must be met before an equity can be ___.

Listing Traded

A market for a company's equity is called a capital market because equity is a ____ term security.

Long

Corporate bonds are generally classified as _____.

Long-term debt

The times interest earned (TIE) ratio measures ...

Long-term solvency

A debenture is a _____.

Long-term unsecured corporate bond

A bond refunding decision involves the analysis of whether it is profitable for a firm to replace existing bonds with new _____ bonds.

Lower coupon

Often after shares have started trading, the investment banker will ____ a market in the security to ensure a ____ market.

Make Liquid

A shelf registration allows to take advantage of ____ conditions and issue shares over a ____ year period.

Market Two

The process of ____ involves investor bankers taking public the companies that had been previously owned by government.

Privatization

A company with a low credit rating can generally expect to pay ____ in interest and receive ____ for its bonds.

More Less

The investment banker serves as the link between corporations in _____ of funds and investors.

Need

Secondary offerings _____.

Occur after the IPO and often include block sales

The times-interest-earned ratio is the ____ income (EBIT) divided by the ____ expense.

Operating Interest

A lease is recognizable as a finance lease if the arrangement transfers _____ of the property to the lessee by the _____ of lease term.

Ownership End

Investors benefit from liquid security markets because they can transform a ____ asset into ____.

Paper Cash

The three components of a bond agreement are the ____ value, the ____ rate and the ____ date.

Par Coupon Maturity

Bond retirement methods include the single lump-sum payment at maturity, serial ____, and by a ____ feature.

Payment Call

Which of the following are considered by a rating agency when assigning a rating?

Performance consistency Debt to equity ratio The companies size

Identify the correct statements regarding preferred stock.

Preferred stock has preference as to dividends Preferred stock is the least used of all long-term corporate securities

To solve for the NPV of a bond refunding decision, the present value of the net costs is subtracted from the _____.

Present value of net savings

An initial public offering takes place in which market?

Primary

The securities trade in the money markets are:

Promissory notes

A firm is said to be "going private" if they have transitioned from being a ____ company to a ____ company.

Public Private

Capital markets provide a place for firms to ____ capital and for individuals to ____ in promising business opportunities.

Raise Invest

A company issuing bonds with a high rating can generally expect to _____ compare to a company with a low rating.

Raise more capital at a lower cost

What are the disadvantages to being a public company?

Regulatory and reporting costs are high. Attention is focused on short term performance.

By underwriting a security issue, an investment bank takes on the _____ of selling the new issue.

Risk

The US Treasury _____ short-term securities when the government spends more money and it receives in tax revenue, and _____ short-term securities when it receives more tax revenue than it spends.

Sell Buys

If an investor is holding a junior mortgage, the investor will receive payment after all ____ obligations have been made.

Senior

Which of the following are methods of retiring bonds?

Sinking fund Call feature Single sum payment

Which of the following is an example of a secured debt? A delivery company pledges its trucks to its bondholders.

The bondholders have the right to take possession of the trucks should the company default

Which of the following are classified as inflows in a bond refunding decision?

The difference between the old and new interest rates

The yield to maturity of a bond is _____.

The discount rate that makes the net present value of the bond equal to zero

How is a private placement of equity different from a public offering?

The equity is purchased directly by the investor and it cannot be resold in the public security markets.

Which of the following is a finance lease.

The fair value of the asset is $1,000 and the present value of the lease payments is $1,450. A company signs a 16 year lease for an asset with a useful life of 20 years.

What does a bond rating of C typically indicate?

The issurer is in default

Which of the following are disadvantages of having debt in the capital structure?

The obligation must be met regardless of economic position. Debt can depress common stock values.

In addition to an analysis of a company's financial and industry characteristics, an investment banker will rely on ____ when pricing the security.

The price to earnings ratio of similar public companies

Which of the following events have contributed to the worldwide demand of capital?

The reduction in telecommunication costs

When a company issues additional shares, typically _____.

There is temporary weakness in the stock price due to perceived earnings dilution

Investment bankers provide advice to clients on _____.

Timing of sales Corporate restructuring Mergers and acquisitions

True or False: A debenture is higher risk than collateral debt.

True

True or False: Capital markets are a way of allocating capital to its most efficient user.

True

True or False: Corporate bond vs. common stock issuances make up the majority of external financing by corporations.

True

True or False: In the 1970s, many small companies decided to go private in order to save money on annual report expenses, legal and accounting fees, and security analysts meetings.

True

True or False: The Glass-Steagall Act was created to reduce the risk of putting the banking system at risk of default.

True

True or False: The investment banker is concerned with the after market performance of a security because he must maintain relationships with the buyers of the security in order to have future business.

True

True or False: The managing investment banker is generally responsible to stabilize the IPO offering during the distribution period.

True

If a stock rises significantly on its first day of trading, this means it was ____ by the investment banker. Share prices typically ____ after a secondary offering is announced.

Underpriced Fall

When additional shares are to be issued, the investment bankers will generally set the price at slightly below the current market value. This process is known as ____.

Underpricing

Which security is NOT traded in the money markets?

Unsecured notes

What two questions do firms have to ask when undertaking a bond refunding?

When should the bonds be called? Should callable bonds be issued?