Equity Valuations

Question 1

Debt Securities

Answer 1

Promise to repay borrowed funds - bonds

Question 2

Equity Securities

Answer 2

Represent ownership positions - common, preferred, warrants

Question 3

Publicly Traded Securities

Answer 3

Traded on exchanges through dealers subject to regulations

Question 4

Derivate Contract

Answer 4

Value depends on (or derives from) the value of other assets, (i.e., equities, equity index, debt, debt index, other financial contracts); gold, wheat, oil

Question 5

Private Securities

Answer 5

Not traded in public marked, illiquid, not subject to regulations

Question 6

Three Functions of Financial Systems:

Answer 6

1. Allow entities to save, borrow, issue equity capital, manage risks, exchange assets, and utilize information
2. Determine the return that equates to aggregate saving and borrowing.
3. Allocate capital efficiently

Question 7

Bill and hold Transactions

Answer 7

The customer buys the goods and receives an invoice but requests that the firm keep the goods at their location fo a period of time. The use of fictious bill and hold transactions can increase earnings in the current period by recognizing revenue for goods that are actually still in inventory. Revenue for future periods will be decreased as real customer orders for these Bill and Hold items are filled but not recognized in revenue, offsetting previous overstatement of revenue.

Question 8

Common Shares

Answer 8

Represent an ownership interest in a company and are the predominant type of equity security.

As a result, investors share in the operating performance of the company, participate in the governance process through voting rights, and have a claim on the company’s net assets in the case of liquidation

Question 9

Four Characteristics of Common Shares

Answer 9

1. Represents an ownership interest
2. Comes after debt holders and preferred equity is in liquidation
3. Voting Rights
4. Firms have no obligation to pay individuals

Question 10

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