5.1 Financial Markets and Securities Offerings Flashcards
Confidential negotiations between Company A and Company B were completed this morning. It was decided that in 1 week, it will be publicly announced that Company A will acquire Company B for a cash offer of a 30% premium over Company B’s current market price. If the stock price of Company B does not react at all today but rises by 30% with the public announcement next week, this implies that the market is
A. Weak form efficient but is not semi-strong form efficient
B. Strong form efficient but is not semi-strong form efficient
C. Semi-strong form efficient but is not strong form efficient
D. Strong form efficient but is not weak form efficient
C. Semi-strong form efficient but is not strong form efficient
Which of the following financial instruments can be traded in international money markets?
A. Mortgages.
B. Preferred stocks.
C. Government treasury bills.
D. Government treasury bonds.
C. Government treasury bills.
Funds are borrowed or lent for short periods (less than 1 year) in money markets. Examples of instruments traded in money markets are U.S. Treasury bills, bankers’ acceptances, commercial paper, negotiable certificates of deposit, money market mutual funds, Eurodollar market time deposits, and consumer credit loans. Capital markets trade stocks and long-term debt.
The strong form of the efficient markets hypothesis (EMH) states that current market prices of securities reflect
A. All publicly available information.
B. All information whether it is public or private.
C. No relevant information.
D. Only information found in past price movements.
B. All information whether it is public or private.
The EMH states that stock prices reflect all relevant information, so the market is continuously adjusting to new information. Stock prices are in equilibrium, so investors cannot earn abnormal returns. The strong form of the EMH states that all public and private information is instantaneously reflected in current market prices of securities. Thus, investors cannot earn abnormal returns.
The semistrong form of the efficient markets hypothesis (EMH) states that current market prices of securities reflect
A. No pertinent information.
B. All pertinent information.
C. Only information contained in past price movements.
D. Only publicly available information.
D. Only publicly available information.
According to the EMH, stock prices are in equilibrium and investors cannot obtain abnormal returns, that is, returns in excess of the riskiness of their investments. The semistrong form of the EMH postulates that current market prices reflect all publicly available information. However, investors with inside information can still earn an abnormal return.
A group of investment banks working together to offer new stock to the public is a
A. Carve-out.
B. Hedge fund.
C. Syndicate.
D. Spin-off.
C. Syndicate.
A syndicate is a group that works together in a combined effort to accomplish a particular task, such as a group of investment banks working together to offer a new stock to the public.
Which one of the options below best describes a public offering where there is less price uncertainty due to the existence of a benchmark price?
A. A red herring registration.
B. An initial public offering.
C. Shelf registration.
D. A subsequent or secondary offering.
D. A subsequent or secondary offering.
Later issues of stock by the same company are subsequent offerings. Secondary markets provide for the trading of previously issued securities. The sale of the stock in the primary market can be used as a benchmark because the same type of securities were already issued in this market.
An agreement in which the underwriter attempts to sell as much as possible of an initial public offering, but does not guarantee the sale of the entire offering is a
A. Best-efforts deal.
B. Firm commitment deal.
C. Carve-out deal.
D. Syndicate deal.
A. Best-efforts deal.
Best efforts sales of securities provide no guarantee that the securities will be sold or that enough cash will be raised. The investment banker receives commissions and is obligated to provide his or her best effort to sell the securities.
What are some advantages of going public?
- Increased ability to raise additional funds
- Establishment of the firm’s value in the market
- Increased liquidity in the firm’s stock
What are some disadvantages of going public?
- Increased reporting requirements and associated costs
- Increased access to the company’s operating data by competitors
- Increased pressure from outside shareholders for earnings growth
- Stock prices that do not accurately reflect the true net worth of the company
- Diluted control of the company
Which of the following statements is not correct with regard to initial public offerings (IPOs)?
A. In a best-efforts offering, the underwriter has no obligation to purchase unsold shares.
B. Best-efforts offerings provide the firm with the greater assurance that all offered shares will be sold.
C. More risky stock offerings are done on best-efforts basis.
D. In an underwriting offering, the underwriter has an obligation to purchase all unsold shares.
B. Best-efforts offerings provide the firm with the greater assurance that all offered shares will be sold.
Best-efforts offerings do not provide the firm with greater assurance that all offered shares will be sold. IT is a best-efforts only offering. Thus, there can be no assurance that any or all of the shares being offered will be sold.
The over-the-counter (OTC) market is
A. An auction market where trading takes place at a particular physical site like the New York Stock Exchange.
B. An auction market that trades the majority of stocks.
C. A dealer market where brokers and dealers are linked by telecommunications equipment to trade securities.
D. A dealer market that trades securities on the stock exchanges due to the high dollar volume of trading.
C. A dealer market where brokers and dealers are linked by telecommunications equipment to trade securities.
The OTC market is a dealer market, in which brokers and dealers are linked by telecommunications equipment. Securities not traded on the stock exchanges are traded in the OTC market. The dollar volume of trading is much greater on the stock exchanges than the OTC market because the largest companies are usually listed on the stock exchanges. However, the majority of all stocks are traded in the OTC market.
In capital markets, the primary market is concerned with the provision of new funds for capital investments through
A. Exchanges of existing bond and stock securities.
B. The sale of forward or future commodities contracts.
C. New issues of bond and stock securities.
D. New issues of bond and stock securities and exchanges of existing bond and stock securities.
C. New issues of bond and stock securities.
The primary market is the market for new stocks and bonds. In this market, wherein investment money flows directly to the issuer, securities are initially sold by investment bankers who purchase them from issuers and sell them through an underwriting group. Later transactions occur on securities exchanges or other markets.
Which of the following entities is most likely to assist investors in assessing the default risk of a specific corporate bond?
A. Investment banks.
B. Credit rating agencies.
C. Bond dealers.
D. Brokerage firms.
B. Credit rating agencies.
Credit risk is the risk that the issuer of a debt security will default. This risk can be gauged by the use of credit rating agencies.
The efficient markets theory implies that securities prices are
A. Always less than their fair value.
B. Fair and a reflection of all publicly available information.
C. Not a good estimate of future cash flows.
D. Not the best benchmark for corporate financial decisions.
B. Fair and a reflection of all publicly available information.
The efficient market theory proposes that the market is continuously adjusting to new information and acting to correct pricing errors.
An analyst is in the process of reviewing the following information on a publicly traded toy manufacturer:
* Share price for the last 20 years
* 10-Q filings for the last 5 years
* 10-K filings for the last 15 years
* Website for the toy company
The above collection of data is an example of which of the following?
A. Strong form of the efficient market theory.
B. Semi-weak form of the capital asset pricing theory.
C. Semi-strong form of the efficient market theory.
D. Weak form of the capital asset pricing theory.
C. Semi-strong form of the efficient market theory.
Prices reflect all publicly available information, such as the share price, 10-Q filings, and 10-K filings for previous years as well as the company’s website in a semi-strong efficient market.
