5360- Money and Capital Markets Chapter 10

Choose the rights of common stockholders that are not available to other individuals. 1. Common stockholders are permitted to vote on key matters concerning the firm such as approval of amendments to the corporate charter or adoption of bylaws. 2. Common stockholders have priority over a company's income, meaning they are paid dividends before all other shareholders. 3. Common stockholders are permitted to purchase the product of the company at a given discount.

1. Common stockholders are permitted to vote on key matters concerning the firm such as approval of amendments to the corporate charter or adoption of bylaws.

Venture capital firms commonly attempt to cash out as soon as is possible following IPOs. Describe the likely effect that would have on the stock price at the time of lockup expiration. If many VC firms are selling their shares at lockup expiration, there is 1. (upward/downward) pressure on the stock price.

1. Downward

Were initial returns of Internet IPOs in the late 1990s higher or lower than normal? Why? The initial returns of Internet IPOs in the late 1990s were 1. (low/high), because 2. (many/few) investors wanted to invest in them.

1. High 2. Many

How do you think accounting irregularities affect the pricing of corporate stock in general? Generally speaking, accounting irregularities introduce additional uncertainty and risk. Consequently, investors would require a 1. (higher/lower) rate of return, which would result in a 2. (higher/lower) stock price.

1. Higher 2. Lower

Describe a lockup provision and explain why it is required by the lead underwriter. The lockup provision restricts insiders and 1. (insiders and individual investors/insiders and venture capital firms) from selling their shares until a specified period (usually 6 months) after the IPO in order to prevent 2. (upward/downward)2 pressure on the price of the stock.

1. Insiders and Venture Capital Firms 2. Downward

Why is bookbuilding sometimes criticized as a means of setting the offer price? The bookbuilding process dictates an offer price that is 1. (higher/lower) than what some institutional investors would pay.

1. Lower

Describe international ETFs, and explain how ETFs are exposed to exchange rate risk. Exchange-traded funds are 1. (active/passive) funds that track a specific index. By investing in an international exchange-traded fund, investors can invest in a specific index representing a foreign country's stock market. The ETFs are denominated in 1. (foreign currency/dollars). The net asset value of an international ETF is determined by translating the 3. (foreign currency/dollar) value of the foreign securities into 4. (foreign currency/dollars) . Thus, a weaker 5. (foreign currency/dollar) will reduce the net asset value in 6. (foreign currency/dollars).

1. Passive 2. Dollars 3. Foreign Currency 4. dollars 5. Foreign Currency 6. dollars

Describe spinning and laddering in the IPO market. 1. (Laddering/Spinning) is the process in which an investment bank allocates shares from an IPO to corporate executives who may be considering an IPO or other business that would require the help of an investment bank. 2.(Laddering/Spinning) involves investors placing bids for IPO shares on the first day that are above the offer price.

1. Spinning 2. Laddering

Explain why stocks traded on the NYSE generally exhibit less risk than stocks that are traded on other exchanges. 1. Stocks of relatively large firms with large trading volume are mostly traded on the NYSE. 2. Only stocks of the foreign firms approved by the SEC are traded on the NYSE. 3. All operations with stocks traded on the NYSE are verified and guaranteed by the Fed.

1. Stocks of relatively large firms with large trading volume are mostly traded on the NYSE.

Why does a firm do a road show before its IPO? 1. The firm does a road show to promote its offering and to convince some large investors to invest in the shares of the firm. 2. The firm does a road show to discuss with institutional investors the offer price of stock at the time of the IPO. 3. The firm does a road show to promote its offering to small investors and not to allow large investors to have a significant impact on the management of the firm.

1. The firm does a road show to promote its offering and to convince some large investors to invest in the shares of the firm.

What are some possible disadvantages to investors who invest in stocks listed on a private stock market? 1. The trading volume in a private stock market is very limited. With such limited participation by investors, it is difficult to determine the appropriate market price. 2. Investors need to register with the private stock exchange, and prove that they have sufficient income (such as about $200,000 per year) and sufficient net worth (such as at least $1 million). 3. Private firms listed on private stock exchanges are usually not profitable enough to go public and they do not have other sources of obtaining funds.

1. The trading volume in a private stock market is very limited. With such limited participation by investors, it is difficult to determine the appropriate market price. 2. Investors need to register with the private stock exchange, and prove that they have sufficient income (such as about $200,000 per year) and sufficient net worth (such as at least $1 million).

Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares. The announcement of stock repurchases implies that investors interpret the announcement as signaling management's perception that the shares are 1. (undervalued/overvalued). Investors respond favorably to this signal so that the 2. (demand for the stock increases/demand for the stock decreases/supply of the stock increases/supply of the stock decreases) placing upward pressure on the stock price.

1. Undervalued 2. Demand for the stock increases

Which of the following financers has a strategy of investing in companies that need funding in exchange for a majority stake in the company? 1. A crowdfunding platform 2. A private equity fund 3. A venture capital fund

2. A private equity fund

Explain the use of a prospectus developed before an IPO. 1. A prospectus provides guarantees to potential investors that the issuing firm will not face the threat of bankruptcy. 2. A prospectus contains detailed information about the firm and includes financial statements and a discussion of the risks involved in the firm's business. 3. A prospectus describes all advantages of investing in the firm's stock acting as a kind of advertisement.

2. A prospectus contains detailed information about the firm and includes financial statements and a discussion of the risks involved in the firm's business.

Businesses valued at less than $50 million or so rarely go public. Explain the limitations to such businesses if they did go public. 1. A public offering of stock may be feasible only if the firm is valued more than $50 million according to government regulation of the stock market because smaller firms cannot incur expenses from complying with rules required of public companies. 2. A public offering of stock may be feasible only if the firm will have a large enough shareholder base to support an active secondary market. Otherwise, the shares would be illiquid, and stockholders who want to sell shares would be forced to sell at a discount from the fundamental value. 3. A public offering of stock may be feasible only if the demand for the firm's shares, determined by security firms, is high enough, which is rarely so for firms valued at less than $50 million.

2. A public offering of stock may be feasible only if the firm will have a large enough shareholder base to support an active secondary market. Otherwise, the shares would be illiquid, and stockholders who want to sell shares would be forced to sell at a discount from the fundamental value.

Explain how ADRs enable U.S. investors to become part owners of foreign companies. 1. ADRs are licences that are traded in the United States and allow U.S. investors to enter the international stock market in order to purchase foreign securities. 2. ADRs are certificates that are traded in the United States and represent ownership of a foreign stock, so U.S. investors can purchase ADRs as a method of investing in foreign securities. 3. ADRs are certificates that represent ownership of a foreign stock and can only be exchanged (and never purchased) for shares of any U.S. firm of the same value.

2. ADRs are certificates that are traded in the United States and represent ownership of a foreign stock, so U.S. investors can purchase ADRs as a method of investing in foreign securities.

Discuss the concept of asymmetric information. Explain why it may motivate firms to repurchase some of their stock. 1. Asymmetric information may make investors think that the stock is overvalued, so they may stop buying them and firms are forced to repurchase some of their stock in order to prevent downward pressure on the stock prices. 2. Asymmetric information may allow a firm's managers to realize when its stock is undervalued, and they may repurchase shares at that time. 3. Asymmetric information may make potential investors think that the stock is overvalued, so firms have to repurchase some of their stock in order to prove that the shares are not overvalued.

2. Asymmetric information may allow a firm's managers to realize when its stock is undervalued, and they may repurchase shares at that time.

Choose incentives for private equity funds to invest in a firm and improve its operations. 1. Private equity funds invest money of rich people who want to support a start-up and do not expect any return on their money. 2. Managers of a private equity fund take a percentage of the profits they earn from their investments in return for managing the fund. So, they are motivated to improve firms' performance. 3. If private equity funds were able to improve the business substantially, they should be able to sell their stake to another firm for a much higher price than they paid for it.

2. Managers of a private equity fund take a percentage of the profits they earn from their investments in return for managing the fund. So, they are motivated to improve firms' performance. 3. If private equity funds were able to improve the business substantially, they should be able to sell their stake to another firm for a much higher price than they paid for it.

An over-the-counter market is a secondary securities market where investors can buy and sell stock. Which of the following are examples of over-the-counter markets? Check all that apply. 1. Nasdaq 2. Pink 3. NYSE 4. OTCQB

2. Pink 4. OTCQB

What is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock? 1. Securities firms purchase stock for individual investors but at the same time limit the amount of the stock to be sold to ensure stability in the stock's price. 2. Securities firms distribute or place stock for corporations and serve as intermediaries since they have experience to know how much stock can be digested by the market. 3. As securities firms know exactly the level of supply and demand in the stock market, they intervene in the market in such way that allow to maximize the proceeds that the issuing firm receives from the IPO.

2. Securities firms distribute or place stock for corporations and serve as intermediaries since they have experience to know how much stock can be digested by the market.

Why would investors want to flip shares? 1. Some investors flip a part of their shares in order to create increased demand and earn a very high return on the other part of their shares without tying their funds up for a long period of time. 2. Some institutional investors flip shares in order to take advantage of an initial return over the first day because IPO performance tends to be unusually high on the first day, followed by a downward drift. 3. Some individual investors flip shares because they are not experienced enough and make a choice whether to sell or buy shares based on the stock prices.

2. Some institutional investors flip shares in order to take advantage of an initial return over the first day because IPO performance tends to be unusually high on the first day, followed by a downward drift.

From an investor's viewpoint, how do you think the information used to price stocks changes in response to accounting irregularities? 1. The existence of accounting irregularities often results in asymmetric information where firm's managers have much more information than investors, so investors would rely on the reputation of current stockholders and own intuition in their decision-making process. 2. The existence of accounting irregularities probably results in closer scrutiny of financial statements for investors as well as seeking additional sources of information in addition to the firm's financial statements as part of their decision-making process. 3. The existence of accounting irregularities almost always results in independent audits conducted by consulting agencies that are hired by individual investors in order to get accurate information about the firm's financial conditions and cash flows as part of their decision-making process.

2. The existence of accounting irregularities probably results in closer scrutiny of financial statements for investors as well as seeking additional sources of information in addition to the firm's financial statements as part of their decision-making process.

What factors influence the offer price of stock at the time of the IPO? 1. The offer price is mainly influenced by interest rates prevailing in the market. 2. The offer price is influenced by market and industry conditions and the prevailing market multiples. 3. The offer price is entirely determined by the investors' expectations regarding the firm's future cash flows.

2. The offer price is influenced by market and industry conditions and the prevailing market multiples.

What is the amount of fees that the lead underwriter and its syndicate charge a firm that is going public? 1. The transaction cost (fees) is normally about 2 percent of the gross proceeds received by the issuing firm. 2. The transaction cost (fees) is normally about 7 percent of the gross proceeds received by the issuing firm. 3. The transaction cost (fees) is normally about 16 percent of the gross proceeds received by the issuing firm.

2. The transaction cost (fees) is normally about 7 percent of the gross proceeds received by the issuing firm.

Why are organized stock exchanges used? 1. They are used to place newly issued stock. 2. They are used to facilitate secondary market transactions. 3. They are used to protect the market from entering foreign investors.

2. They are used to facilitate secondary market transactions.

Corporate governance is the process by which a firm is run and controlled by its managers and board of directors. Typically, the firm's board of directors is responsible for ensuring the firm is acting in the best interest of its shareholders; however, there are instances when the shareholders themselves need to step in to ensure the firm is on the right track. Suppose a firm's shareholders are dissatisfied with the way that management is running the firm. What options do the shareholders have in this situation? Check all that apply. 1. They can simply tell management what to do and expect them to follow their directions, since they own the company. 2. They can choose not to act, retain their shares, and hope that management's decisions will improve the performance of the stock. 3. They can participate in proxy contests to remove and replace members of the firm's board of directors. 4. They can communicate their concerns to other shareholders in an attempt to get a large enough team of advocates together to pressure board members into changing the direction that the company is going in.

2. They can choose not to act, retain their shares, and hope that management's decisions will improve the performance of the stock. 3. They can participate in proxy contests to remove and replace members of the firm's board of directors. 4. They can communicate their concerns to other shareholders in an attempt to get a large enough team of advocates together to pressure board members into changing the direction that the company is going in.

Why do firms engage in IPOs? 1. Firms engage in IPOs when they are willing to enter international markets and need to be known there. 2. Firms engage in IPOs in order to attract more people to management process of the company in the case when the current management can not solve any problem. 3. Firms engage in IPOs when they have feasible expansion plans but are already near their debt capacity.

3. Firms engage in IPOs when they have feasible expansion plans but are already near their debt capacity.

Why are there many IPOs in some periods and few IPOs in other periods? 1. Firms prefer to engage in IPOs when business conditions and market conditions are unfavorable because firms are confident that the stock prices will not go down since they are already low. 2. Firms prefer to engage in IPOs when business conditions and market conditions are unfavorable because in this situation there is a relatively low demand for the firm's products, so the firm can concentrate more on IPO rather than on production. 3. Firms prefer to engage in IPOs when business conditions and market conditions are favorable because when business conditions are poor, the market conditions are weak, meaning that firms would have to sell their shares at a low price.

3. Firms prefer to engage in IPOs when business conditions and market conditions are favorable because when business conditions are poor, the market conditions are weak, meaning that firms would have to sell their shares at a low price.

What does it mean to "flip" shares? 1. Flipping shares refers to "booking" shares before the IPO and buying them when the stock prices are at equilibrium. 2. Flipping shares refers to purchasing shares shortly after the IPO (such as a day or two). 3. Flipping shares refers to selling shares shortly after (such as a day or two) obtaining them at the IPO.

3. Flipping shares refers to selling shares shortly after (such as a day or two) obtaining them at the IPO.

Denton Co. plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer price for the stock be $12 per share to ensure that all the shares can be easily sold. What is the advantage of following the advice of the securities firm? What is the disadvantage? 1. The advantage is that Denton Co. wants to have a successful offering in which it can sell all of its shares and receive the highest possible profit. The disadvantage is that not all the shares can be sold at the offered price. 2. The advantage is that Denton Co. wants investors to believe that they purchased stock at a lowest possible price, which was ensured by the security firm. The disadvantage is that proceeds from selling the stock may be insufficient to expand Denton's business. 3. The advantage is that Denton Co. wants to have a successful offering in which it can sell all of its shares, and it wants investors to believe that they made a good investment. The disadvantage is that Denton may receive less in proceeds from selling the stock than expected.

3. The advantage is that Denton Co. wants to have a successful offering in which it can sell all of its shares, and it wants investors to believe that they made a good investment. The disadvantage is that Denton may receive less in proceeds from selling the stock than expected.

Explain why some public firms decided to go private in response to the passage of the Sarbanes-Oxley (SOX) Act. 1. Public firms close to bankruptcy decided to go private as the act did not allow to use creative accounting in a manner that could misrepresent their financial condition. 2. The cost of adhering to the guidelines of the act is higher than the profits of small public firms, so being public would lead to the closure of these companies. 3. The cost of adhering to the guidelines of the act substantially reduces the value of many small publicly held firms so that they would have a higher value if they were private.

3. The cost of adhering to the guidelines of the act substantially reduces the value of many small publicly held firms so that they would have a higher value if they were private.

What is the meaning of an initial return for an IPO? 1. The initial return is the difference between the actual and expected return over the first month of trading. 2. The initial return is the return from the offer price until all shares are sold out. 3. The initial return is the return from the offer price until the end of the first day of trading.

3. The initial return is the return from the offer price until the end of the first day of trading

Describe the process of bookbuilding. 1. The security firm engages in bookbuilding by checking the solvency of the issuing company and then setting the mandatory price range per share. 2. The largest investor engages in bookbuilding by evaluating the issuing firm and providing it with information about the maximum price per share that can be offered. 3. The lead underwriter engages in bookbuilding by soliciting indications of interest in the IPO by institutional investors, so as to determine demand.

3. The lead underwriter engages in bookbuilding by soliciting indications of interest in the IPO by institutional investors, so as to determine demand.

Explain how underwriters use the overallotment option in IPOs. 1. The overallotment option gives the lead underwriter the right to purchase shares from the issuing firm at a lower than the IPO offer price and then sell them on the stock market at a higher than the IPO offer price, earning a profit on the price difference. 2. The overallotment option gives the lead underwriter the right to issue as many extra shares as the underwriter wants if the demand for the firm's stock is unpredictably high. The underwriter gains from issuing the extra shares, as only a part of the proceeds from selling the extra shares is distributed to the issuing company. 3. The overallotment option gives the lead underwriter the right to purchase extra shares from the issuing firm at the IPO offer price and issue additional shares to investors at the offer price and earn a commission. The lead underwriter purchases the extra shares at a lower than the offer price if the market price declines below the offer price.

3. The overallotment option gives the lead underwriter the right to purchase extra shares from the issuing firm at the IPO offer price and issue additional shares to investors at the offer price and earn a commission. The lead underwriter purchases the extra shares at a lower than the offer price if the market price declines below the offer price.

Stock indexes are used by investors to compare the performance of individual stocks with general market indicators for certain stock exchanges. Which stock index uses a price-weighted average of approximately 3,500 U.S. firms' stocks? 1. The Dow Jones Industrial Average 2. The Composite Index 3. The Standard and Poor's 500 4. The Wilshire 5000 Total Market Index

4. The Wilshire 5000 Total Market Index

Consider a college scholarship finder idea that uses an algorithm to find all the possible scholarships offered by colleges and matches them with prospective applicants. The brain behind the idea, Deborah, needs to raise money in order to finance the creation and expansion of the business that she plans to call Scholarshipary Inc.Deborah decides to raise money through public equity investments. Which of the following are examples of public equity investments? Check all that apply. A. Deborah launches an IPO aimed at raising $140 million. B. Deborah issues preferred stock on the New York Stock Exchange in the amount of $155 million. C. Deborah gets a private equity fund to invest $600,000 in the business. D. Deborah invests $300,000 of her own money in the business.

A. Deborah launches an IPO aimed at raising $140 million. B. Deborah issues preferred stock on the New York Stock Exchange in the amount of $155 million.

Consider a hockey gear idea that involves creating high-performance hockey gear completely from recycled materials. The brain behind the idea, Kyoko, needs to raise money in order to finance the creation and expansion of the business, which she plans to call Hocky, LLC. Kyoko does not want her company to go public yet, so she decides raising money through private equity investments is the best route to go. Which of the following are examples of private equity investments? Check all that apply. A. Kyoko gets her brother to invest $60,000 in the business. B. Kyoko gets a private equity fund to invest $600,000 in the business. C. Kyoko gets a venture capital fund to invest $5 million in the business. D. Kyoko launches an IPO aimed at raising $2 million.

A. Kyoko gets her brother to invest $60,000 in the business. B. Kyoko gets a private equity fund to invest $600,000 in the business. C. Kyoko gets a venture capital fund to invest $5 million in the business.

Which of the following strategies can underwriters use to prevent institutional investors from flipping? Check all that apply. A. They can agree to make more shares of future IPOs available to investors that hold on to the initial shares for a relatively long period of time. B. They can require an overallotment clause in the underwriting agreement of the IPO. C. They can agree to sell the shares in the IPO at a lower price than suggested by their bookbuilding analysis. D. They can require a lockup clause in the underwriting agreement of the IPO.

A. They can agree to make more shares of future IPOs available to investors that hold on to the initial shares for a relatively long period of time. D. They can require a lockup clause in the underwriting agreement of the IPO.

Suppose an underwriter encourages investors to place first-day bids for IPO shares that are above the offer price in exchange for reserving highly demanded IPO shares for them in the future. What type of abuse is the underwriter partaking in? A. Distorting financial statements B. Spinning C. Laddering D. Charging excessive commission

C. Laddering

________________________ occurs when a broker charges a higher-than-usual fee (or commission) to sell highly demanded IPO shares to an investor. Oftentimes, investors don't mind the higher fee, because they will more than make up for it with the return on the shares once the price increases.

Charing Excessive commission

What financial institution has this activity in the stock market? Issue stock when they are starting to become inadequately funded and need to boost their capital base. Manage trust funds, usually containing stocks, that are set up by individuals to be given to a beneficiary in the future.

Commercial Bank

Suppose you're an investor looking to purchase stock in Scholarshipary Inc. and are extremely passionate about wanting to vote for the authorization to issue new shares of common stock. Which type of stock would you want to invest in? Common stock Preferred stock

Common Stock

The _______________ uses a price average of all stocks traded on the NYSE.

Composite Index

_______________ is a type of private equity financing that typically invests money in businesses in exchange for either equity in the business or a tangible reward, such as the product that the company is producing. A common ____________ website is Kickstarter, which typically allows small-time investors to back the production of a new product in exchange for the product, special perks, and add-ons to the product.

Crowdfunding

_______________ occurs when an underwriter knows that a firm has weak internal controls (and thus inaccurate financial statements) and engages its IPO at an offer price that is well above what it should be. The firm brings in more funding than it should have been able to by misleading the investors (something that the SEC tries to prevent prior to the engagement of the IPO).

Distorting Financial Statements

The ________________ is a stock index that uses a price-weighted average of 30 large and popular U.S. firms' stocks. Some of the notable firms used in this index are Coca-Cola, IBM, Apple, Home Depot, Disney, and Nike.

Dow Jones Industrial Average

True or False: One of the main differences between organized exchanges and over-the-counter markets is that some companies that trade on organized exchanges do not have to meet any financial standards or register with the SEC. True False

False

What financial institution has this activity in the stock market? Issue stock when they are starting to become inadequately funded and need to boost their capital base.

Finance Companies

_____________ occurs when investors recognize unusually high returns in an IPO and attempt to purchase stock at the offer price with the intention of selling the stock in the near future to capitalize on the price increase. The way that an underwriter can prevent this is by agreeing to make more shares of future IPOs available to investors that hold on to the initial shares for a relatively long period of time. Additionally, they can include a lockout clause in the underwriting agreement, which is explained next.

Flipping

What financial institution has this activity in the stock market? Issue stock when they are starting to become inadequately funded and need to boost their capital base. Invest a large portion of the premiums they collect in the stock market.

Insurance Companies

____________ occurs when an underwriter encourages investors to place first-day bids for IPO shares that are above the offer price in exchange for reserving highly demanded IPO shares for them in the future. Usually investors don't mind paying higher than market price for the shares because they will make up the difference with the return they get on the future shares.

Laddering

A ______________ clause in the underwriting agreement of the IPO allows them to prevent the original owners of the firm from selling their shares for a specified time period, preventing them from selling their shares right after the IPO, causing a price drop.

Lockout

What financial institution has this activity in the stock market? Invest a large portion of funds accumulated from contributions from employers and/or employees (pension funds) in the stock market.

Pension Funds

A ________________ is a type of private equity financing that typically invests money in businesses in exchange for a majority ownership in the company. Because they typically seek large stakes in the company (or sometimes even 100% ownership), ___________ usually invest more money in a company than a venture capital fund would.

Private Equity Fund

What financial institution has this activity in the stock market? Use funds from their investment portfolios to invest in stocks.

Savings Bank

What financial institution has this activity in the stock market? Issue stock when they are starting to become inadequately funded and need to boost their capital base. Place new issues of stock for companies that need to raise capital. Offer advice to corporations that are considering acquiring ownership of other companies by purchasing their issued stocks. Execute, buy, and sell transactions for investors looking to purchase stocks from a company or sell their existing stocks in a company.

Securities Firm

________________ occurs when an underwriter offers shares from an IPO to an investor for a favor in the future. They might offer this type of deal to (1) a business requiring assistance from a securities firm or (2) corporate executives from a third-party firm who have indicated that they may purchase shares from a different IPO.

Spinning

The ___________________ uses a value-weighted average of 500 of the largest U.S. firms' stocks. Some of the notable firms used in this index are Microsoft, Apple, Amazon, and Facebook.

Standard and Poor's 500

What financial institution has this activity in the stock market? Sell shares to individual investors and use the funds to invest in stocks.

Stock Mutual Funds

What financial institution has this activity in the stock market? Issue stock when they are starting to become inadequately funded and need to boost their capital base.

Stock-owned savings institutions

True or False: A firm functioning inefficiently might be targeted in an acquisition to provide synergistic benefits to the acquiring firm. True False

True

A ____________ is a type of private equity financing that typically invests money in businesses in exchange for a minority ownership in the company. In addition, sometimes __________ will ask for seats on advisory boards in order to ensure that the company is moving in the right direction. A _____________ will typically exit from its original investment within four to seven years, after the business has opened up a round of financing to the public via a public stock offering.

Venture Capital Fund

The ____________________ Index uses a price-weighted average of approximately 3,500 U.S. firms' stocks. Some of the notable firms used in this index are American Airlines, Aflac, Clorox, and American Eagle Outfitters.

Wilshire 5000 Total Market Index

If a firm thinks that their stock is undervalued, they can try to increase the value of the stock by doing what? a. Engaging in stock repurchasing b. Creating a shelf registration c. Conducting a secondary stock offering d. Conducting an initial public offering

a. Engaging in stock repurchasing

________________ are portfolios of international stocks created and managed by various financial institutions. a. International mutual funds b. American depository receipts c. Exchange rate options d. Initial public offerings

a. International mutual funds

The annual dividend on Grozky, Inc. stock is $5 per share and the stock's prevailing price is $93.13 per share. Thus, the stock's dividend yield is ____ percent. a. 18.63 b. 5.37 c. 8.81 d. none of the above

b. 5.37 calculated by dividing (5.00/93.13) x 100

Which of the following is not true with respect to venture capital (VC) funds? a. When a VC fund decides to invest in a business, it will negotiate the terms of its investment, including the amount of funds it is willing to invest. b. 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. c. VC funds receive money from wealthy investors and from pension funds that are willing to maintain the investment for a long-term period. d. All of the above are true with respect to VC funds.

b. 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.

__________ occurs when the underwriter allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of a securities firm. a. Flipping b. Spinning c. Laddering d. None of the above

b. Spinning

Corporate governance is designed to protect shareholders and allow poor management to be replaced; however, there can be barriers to this mechanism that protect existing management and make changes of control harder. Some of these may be contained in the corporate charter (making them hard to change). These provisions can take many forms, including an antitakeover amendment. Which of the following best describes this element in a firm's charter? a. This amendment grants compensation to employees at the management level in the event that they are let go or the firm is acquired. b. This amendment requires approval from at least two-thirds of the voting shareholders before the firm can be acquired. c. This amendment prevents the original owners of a firm from selling their shares for a certain amount of time. d. This amendment allows a firm's shareholders to purchase additional shares of the firm's stock once a potential acquirer purchases a certain percentage of the firm's outstanding shares.

b. This amendment requires approval from at least two-thirds of the voting shareholders before the firm can be acquired.

Which of the following is not true regarding the Sarbanes-Oxley Act? a. It requires firms to establish an internal control process for their financial reporting. b. It requires a firm's CEO and CFO to certify that the audited financial statements are accurate. c. It allows public accounting firms to offer non-audit consulting services to an audit client. d. It prevents members of a firm's audit committee from receiving consulting or advising fees or other compensation from the firm beyond that earned from serving on the board.

c. It allows public accounting firms to offer non-audit consulting services to an audit client.

Which investment method would an investor use if they want their return to be tied to the performance of a foreign stock index? a. An American depository receipt b. Shares of an international mutual fund c. Shares of an exchange-traded fund d. Shares of the foreign stock

c. Shares of an exchange-traded fund

When the lockup period expires, the share price commonly a. remains unchanged. b. increases significantly. c. decreases significantly. d. none of the above

c. decreases significantly.

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 d. IPO; bookbuilding

c. offer; bookbuilding

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. overvalued; overvalued c. undervalued; overvalued d. overvalued; undervalued e. none of the above

c. undervalued; overvalued

Possible disadvantages of private stock exchanges to investors include: a. only large institutional investors may purchase shares in privately listed stocks. b. required disclosures may be less than those required when a firm goes public. c. trading volume is limited. d. B and C

d. B and C b. required disclosures may be less than those required when a firm goes public. c. trading volume is limited.

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.

d. a telecommunications network.

An ________________ clause in the underwriting agreement of the IPO allows them to sell an additional percentage of the firm's shares for up to 30 days after the IPO has finished, which is a strategy that an underwriter can use if the firm thinks they could use additional money but is afraid that issuing too many shares will cause a price drop.

overallotment