Fin ch 8

A shelf registration allows firms the opportunity to avoid the normal ______________ day waiting period by allowing preregistration of securities for up to ______________ years.

A. 20-; 2

Common stocks typically have which of the following that bonds do not have? I. Voting rights II. Fixed cash flows III. Set maturity date IV. Tax deductibility of cash flows to investors

A. I only

If all preferred dividend payments that have been missed must be paid before any common stock dividend can be paid the preferred stock is called _____________ preferred stock.

A. cumulative

If the net proceeds are greater than the gross proceeds in an underwritten offering, then

A. the investment banker made a profit on the spread. B. the issuing company underpriced its securities. C. the issue fails to occur. D. the SEC rescinds the issue. ANSWER: E. none of the above

In 2007 the NYSE merged with _________________.

B. Euronext

As of December 2005, trading licenses are required to conduct trades on the floor of the NYSE. Which of the following statements about these trading licenses is/are correct? I. Licenses are auctioned off in a special type of auction called a Dutch auction. II. The NYSE determines the minimum bid price. III. The SEC determines the maximum bid price. IV. Trading licenses are good for 10 years.

B. I and II only

Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not: I. weak form efficient II. semi-strong form efficient III. strong form efficient

B. I and II only

Which of the following is/are true about specialists? I. Investment banks generally cannot be specialists II. Specialists are used by the NASDAQ system III. Market and limit orders are transacted at specialist posts, but the specialist's own account orders are executed elsewhere IV. Specialists help maintain continuous trading

B. I and IV only

The electronic-based market for less actively traded U.S. securities is the

B. OTC Bulletin Board

The NASDAQ automatic order execution system for individual traders placing buy or sell orders of 1000 or fewer shares is called the

B. SOE System

The largest single type of holder of common stock ($) is

B. households

The age group that holds the most stock is the ____________ group.

C. 45-64

Ethanol Lawn Mowers issued 500,000 shares to the public. The gross proceeds were $31,250,000 and the net proceeds were $30 million. Merrel Bench was the lead underwriter and deal negotiator, but 10 other investment bankers (one of which was Golden Sax) were also used to put up capital and help sell the issue. Which of the following statements is/are correct? I. The public paid $62.50 a share. II. Golden Sax was the originating house. III. The spread per share was $3.50. IV. Merrel Bench is the sole book running manager. V. This offer was a syndicated deal.

C. I, IV, and V only

The stamp on a prospectus accompanying a new issue that indicates the issue has not yet been approved for sale by the SEC is called the

C. red herring

As a small (minority) stockholder would you prefer to have cumulative voting or straight voting shares? As a majority shareholder?

Cumulative voting gives a small shareholder a better chance of electing a given board member because they don't have to own (or control by proxy) a majority of shares. As a controlling stockholder, you can ensure that you will always be able to elect the entire board of your choice if you have straight voting.

Computerized markets that automatically match orders between buyers and sellers and are used primarily by institutions traders are called

D. ECNs

In terms of volume of trading and market value of firms traded, the _____________ is the largest U.S. stock market. In terms of number of firms traded, the ___________ is the largest in the United States.

D. NYSE; NASDAQ

Which of the following information is NOT usually found in a Wall Street Journal stock quote?

D. Stock rating

The preemptive right is designed to

D. allow existing shareholders to buy shares of the new offering if they desire.

On the NASDAQ system, the inside quotes are the

D. highest bid and lowest ask.

In a ____________ offering the firm preregisters with SEC any securities it wishes to sell over the next two years.

D. shelf

NYSE listing has traditionally benefited a firm by A. improving the stock's price. B. generating increased publicity for the firm. C. providing easier access to primary market capital.

E. A, B, and C

The NYSE specialists are charged with I. trading for their own account. II. ensuring public limit orders are executed. III. facilitating processing public market orders.

E. I, II, and III

Which of the following indices are value-weighted? I. NYSE Composite II. S&P500 III. NASDAQ Composite IV. Dow Jones Industrial Average

E. I, II, and III only

With ____________ voting, all directors up for election are voted on by the shareholders at the same time in one general election.

E. cumulative

The preliminary version of a security offer that is circulated to potential buyers before SEC approval (registration) is obtained is called a

E. red herring prospectus

What are ECNs? How are they changing trading in the traditional markets?

ECNs are electronic communication networks. These computerized trading systems automatically match buy and sell orders. Since they are electronic, ECNs allow for extended trading hours. As fewer humans and physical overheads are required, ECNs provide a potentially cheaper trading platform than the exchanges. Institutions use ECNs to solicit trading interest on large blocks of shares. The rule changes requiring publishing all quotes from different markets mean that ECN market share is likely to grow at the expense of the NYSE and NASDAQ (hence, a rationale for the mergers between NYSE and Archipelago, and NASDAQ and Instinet).

At year-end a firm has assets of $100 and debts due of $120. In this situation, the stockholders must pay an additional $20 out of their own pocket.

False

Dual class stock refers to firms with both common and preferred stock outstanding.

False

In cumulative voting, a stockholder who owns 51% of the shares can be assured of the ability to elect the entire board of directors.

False

The NYSE recently merged with the London Stock Exchange to form the merged company NYSE Euronext.

False

The market in which firms sell new securities to raise cash is called the secondary market.

False

What are the advantages and disadvantages of foreign investing? How does an ADR help overcome the disadvantages?

International investing can reduce risk by generating additional diversification benefits. These benefits have been small lately because the United States has dominated the rest of the world in economic performance, but this is not likely to continue indefinitely. International investing also introduces foreign exchange risk, information risk and sovereign risk, as well as trading and tax complexities. The ADRs limit foreign exchange risk and other trading complexities. Foreign firms are also required to meet U.S. disclosure requirements when ADRs are issued.

A long-term investor in a high marginal tax bracket will normally prefer a dollar of capital gain to a dollar of dividend yield.

True

When would preferred stock be a better investment choice than common stock or bonds?

Preferred stocks have higher yields than bonds and much higher dividend yields than stocks. One will not get capital gains with preferred stock, however. Thus, if steady high pretax yields are desired, with little or no chance of capital gains, and a tax-sheltered investment vehicle such as an IRA is available, preferred may be an ideal choice.

A seasoned equity offering occurs when an issuer that already has equity publicly trading issues new shares to the public.

True

Data shows that only 11 of 27 recessions prior to 1990 were preceded by a decline in stock prices. Although stocks are a leading economic indicator, what are some reasons why a stock price decline might not indicate an upcoming recession?

Stock prices might drop because equity risk premiums temporarily rise, depressing stock prices without foreshadowing lower growth. It may also be that current stock prices are overly optimistic about future growth, when the over-optimism is corrected, stock prices fall, sometimes sharply. This may occur even if no change in underlying economic growth takes place. One might also observe slower growth than expected that does not result in a recession. More succinctly, expectations may change more rapidly than actual economic growth rates.

In what major ways do stocks differ from bonds?

Stocks have the following characteristics: 1. Discretionary cash flows (dividend payments). The board of directors may choose to pay or not to pay a dividend. 2. Residual claim in the event of bankruptcy. 3. No maturity date, thus there is no guarantee of a return of your principle. 4. Voting rights. As a stockholder you are part owner of the company and have a voice in company decisions. 5. Stock markets are deeper and more actively traded than bond markets.

What are the major effects of the Sarbanes-Oxley Act (SO) of 2002 on the stock markets? What else has the NYSE done to improve corporate governance?

The SO Act: * Created an independent auditing oversight board under the SEC * Increased penalties for corporate wrongdoing * Required more extensive accounting disclosure * Increased ability of aggrieved shareholders to seek recourse from management The NYSE changed listing requirements to ensure: * Listed firms have a majority of independent directors * Boards institute and implement codes of ethics for the board and top management * Require shareholder approval of equity based compensation plans * Require CEOs to annually certify the information given to stockholders

A type of absentee ballot that allows a representative to vote on behalf of the stockholder is called a proxy.

True

An order to buy shares of stock at a specified price or better is called a limit order.

True

If the stock markets are semi-strong efficient, stock prices reflect all historic and current public information about a firm but prices do not reflect inside information.

True

In the event of bankruptcy, a firm's janitor must be paid all of the salary owed to him before stockholders receive anything.

True

Preferred stockholders have a claim senior to common stock but junior to bondholders.

True

Stock splits change the divisor in a price-weighted index but do not result in any net change in the divisor of a value-weighted index.

True

The Dow Jones Industrial Average is a price-weighted index of 30 stocks chosen to represent the overall market.

True

Why have international stock prices fallen as a result of the subprime crisis in the United States?

U.S. economic growth slowed as a result of the subprime crisis and the resulting credit crunch. Slower U.S. growth often results in poorer economic performance overseas. This is one reason why foreign stock prices have not performed well even though most overseas countries with the exception of Great Britain have not had similar mortgage problems. Problems in the United States also engendered a flight to quality until the extent of the crisis could be known. As money moved out of equity markets to safer securities, stock prices fell. Another way to say the same thing is to note that risk premia increased, resulting in stock price declines.

What are weak form, semi-strong form, and strong form efficiency? Does one form of efficiency imply another?

Weak form efficiency implies that past price and trading information is contained in today's stock price and is of no value to an investor. Semi-strong efficiency implies that an investor cannot use any publicly available information to predict tomorrow's price change. Strong form efficiency implies that public and inside information is of no value in predicting tomorrow's price change. Strong form efficiency implies that the markets are also weak and semi-strong form efficient. Likewise, semi-strong form efficiency implies that the markets are also weak form efficient.