Chapter 7

Question 1

Includes all borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payment

Answer 1

debt

Question 2

Funds provided by the firm’s owners (investors or stockholders) that are repaid subject to the firm’s performance.

Answer 2

equity

Question 3

The common stock of a firm is owned by private investors; this stock is not publicly traded.

Answer 3

privately owned (stock)

Question 4

The common stock of a firm is owned by public investors; this stock is publicly traded.

Answer 4

publicly owned (stock)

Question 5

The common stock of a firm is owned by an individual or a small group of investors (such as a family); these are usually privately owned companies.

Answer 5

closely owned (stock)

Question 6

The common stock of a firm is owned by many unrelated individual or institutional investors.

Answer 6

widely owned (stock)

Question 7

An arbitrary value established for legal purposes in the firm’s corporate charter and which can be used to find the total number of shares outstanding by dividing it into the book value of common stock.

Answer 7

par-value common stock

Question 8

Allows common stockholders to maintain their proportionate ownership in the corporation when new shares are issued, thus protecting them from dilution of their ownership

Answer 8

preemptive right

Question 9

A reduction in each previous shareholder’s fractional ownership resulting from the issuance of additional shares of common stock.

Answer 9

dilution of ownership

Question 10

A reduction in each previous shareholder’s fractional claim on the firm’s earnings resulting from the issuance of additional shares of common stock.

Answer 10

dilution of earning

Question 11

Financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned share

Answer 11

rights

Question 12

Shares of common stock that a firm’s corporate charter allows it to issue.

Answer 12

authorized shares

Question 13

Issued shares of common stock held by investors, including both private and public investors

Answer 13

outstanding shares

Question 14

Issued shares of common stock held by the firm; often these shares have been repurchased by the firm.

Answer 14

treasury stock

Question 15

Shares of common stock that have been put into circulation; the sum of outstanding shares and treasury stock

Answer 15

issued shares

Question 16

A statement transferring the votes of a stockholder to another party.

Answer 16

proxy statement

Question 17

The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes.

Answer 17

proxy battle

Question 18

Stock that carries with it multiple votes per share rather than the single vote per share typically given on regular shares of common stock.

Answer 18

supervoting shares

Question 19

voting rights; issued when the firm wishes to raise capital through the sale of common stock but does not want to give up its voting control.

Answer 19

nonvoting common stocK

Question 20

Dollar-denominated receipts for the stocks of foreign companies that are held by a U.S. financial institution overseas.

Answer 20

American depositary shares (ADSs)

Question 21

Preferred stock with a stated face value that is used with the specified dividend percentage to determine the annual dollar dividend.

Answer 21

par-value preferred stock

Question 22

Preferred stock with no stated face value but with a stated annual dollar dividend.

Answer 22

no-par preferred stock

Question 23

Preferred stock for which all passed (unpaid) dividends in arrears, along with the current dividend, must be paid before dividends can be paid to common stockholder

Answer 23

cumulative (preferred stock

Question 24

Preferred stock for which passed (unpaid) dividends do not accumulate.

Answer 24

noncumulative (preferred stock)

Question 25

A feature of callable preferred stock that allows the issuer to retire the shares within a certain period of time and at a specified price.

Answer 25

callable feature (preferred stock) A feature

Question 26

A feature of convertible preferred stock that allows holders to change each share into a stated number of shares of common stock.

Answer 26

conversion feature (preferred stock)

Question 27

Privately raised external equity capital used to fund earlystage firms with attractive growth prospects.

Answer 27

venture capitaL

Question 28

Providers of venture capital; typically, formal businesses that maintain strong oversight over the firms they invest in and that have clearly defined exit strategies.

Answer 28

venture capitalists (VCs)

Question 29

Wealthy individual investors who do not operate as a business but invest in promising early-stage companies in exchange for a portion of the firm’s equitY

Answer 29

angel capitalists (angels

Question 30

The first public sale of a firm’s stock.

Answer 30

initial public offering (IPO)

Question 31

A portion of a security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position.

Answer 31

prospectus

Question 32

A preliminary prospectus made available to prospective investors during the waiting period between the registration statement’s filing with the SEC and its approval.

Answer 32

red herring

Question 33

Financial intermediary that specializes in selling new security issues and advising firms with regard to major financial transactions.

Answer 33

investment banker

Question 34

The role of the investment banker in bearing the risk of reselling, at a profit, the securities purchased from an issuing corporation at an agreed-on price.

Answer 34

underwriting

Question 35

A group of other bankers formed by an investment banker to share the financial risk associated with underwriting new securities.

Answer 35

underwriting syndicate

Question 36

A large number of brokerage firms that join the originating investment banker(s); each accepts responsibility for selling a certain portion of a new security issue on a commission basis.

Answer 36

selling group

Question 37

Theory describing the behavior of an assumed “perfect” market in which (1) securities are in equilibrium, (2) security prices fully reflect all available information and react swiftly to new information, and (3), because stocks are fully and fairly priced, investors need not waste time looking for mispriced securities.

Answer 37

efficient-market hypothesis (EMH)

Question 38

A growing body of research that focuses on investor behavior and its impact on investment decisions and stock prices. Advocates are commonly referred to as “behaviorists.”

Answer 38

behavioral finance

Question 39

An approach to dividend valuation that assumes a constant, nongrowing dividend stream.

Answer 39

zero-growth mode

Question 40

A widely cited dividend valuation approach that assumes that dividends will grow at a constant rate, but a rate that is less than the required return.

Answer 40

constant-growth model

Question 41

A model that determines the value of an entire company as the present value of its expected free cash flows discounted at the firm’s weighted average cost of capital, which is its expected average future cost of funds over the long run.

Answer 41

free cash flow valuation model

Question 42

The amount per share of common stock that would be received if all of the firm’s assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (including preferred stock) were divided among the common stockholders

Answer 42

book value per share

Question 43

The actual amount per share of common stock that would be received if all of the firm’s assets were sold for their market value, liabilities (including preferred stock) were paid, and any remaining money were divided among the common stockholders.

Answer 43

liquidation value per share

Question 44

A popular technique used to estimate the firm’s share value; calculated by multiplying the firm’s expected earnings per share (EPS) by the average price/earnings (P/E) ratio for the industry.

Answer 44

price/earnings multiple approach

Question 45

A collection, or group, of assets.

Answer 45

portfolio

Question 46

A measure of the uncertainty surrounding the return that an investment will earn or, more formally, the variability of returns associated with a given asset

Answer 46

risk

Question 47

The total gain or loss experienced on an investment over a given period of time; calculated by dividing the asset’s cash distributions during the period, plus change in value, by its beginning-ofperiod investment value.

Answer 47

total rate of return

Question 48

The attitude toward risk in which investors would require an increased return as compensation for an increase in risk

Answer 48

risk averse

Question 49

The attitude toward risk in which investors choose the investment with the higher return regardless of its risk

Answer 49

risk neutral

Question 50

The attitude toward risk in which investors prefer investments with greater risk even if they have lower expected returns.

Answer 50

risk seeking

Question 51

An approach for assessing risk that uses several possible alternative outcomes (scenarios) to obtain a sense of the variability among returns.

Answer 51

scenario analysis

Question 52

A measure of an asset’s risk, which is found by subtracting the return associated with the pessimistic (worst) outcome from the return associated with the optimistic (best) outcome

Answer 52

range

Question 53

The chance that a given outcome will occur.

Answer 53

probability

Question 54

A model that relates probabilities to the associated outcomes.

Answer 54

probability distribution