FIN 320 ch 1 and 2 Flashcards
- Which of the following statements is CORRECT?
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations’ less favorable tax treatment.
d. Large corporations are taxed more favorably than proprietorships.
e. Corporate stockholders are exposed to unlimited liability.
c. Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations’ less favorable tax treatment.
- Which of the following statements is CORRECT?
a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
b. One drawback of forming a corporation is that it subjects the firm’s investors to increased personal liabilities.
c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.
d. One advantage of forming a corporation is that it subjects the firm’s investors to fewer taxes.
e. One disadvantage of forming a corporation is that it is more difficult for the firm’s investors to transfer their ownership interests.
a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
- The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
- Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?
a. Pay managers large cash salaries and give them no stock options.
b. Change the corporation’s formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
c. Beef up the restrictive covenants in the firm’s debt agreements.
d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.
e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.
b. Change the corporation’s formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
- Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
a. Decrease the use of restrictive covenants in bond agreements.
b. Take actions that reduce the possibility of a hostile takeover.
c. Elect a board of directors that allows managers greater freedom of action.
d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock.
d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
- Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?
a. Compensating managers with stock options.
b. Financing risky projects with additional debt.
c. The threat of hostile takeovers.
d. The use of covenants in bond agreements that limit the firm’s use of additional debt and constrain managers’ actions.
e. Abolishing the Security and Exchange Commission.
d. The use of covenants in bond agreements that limit the firm’s use of additional debt and constrain managers’ actions.
- Which of the following statements is CORRECT?
a. Well-designed bond covenants are useful for reducing potential conflicts between stockholders and managers.
b. The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
c. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm’s stock to sell at a price below its intrinsic value.
d. Takeovers are most likely to be attempted if the target firm’s stock price is above its intrinsic value.
e. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
b. The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
- You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?
a. This is an example of a direct transfer of capital.
b. This is an example of a primary market transaction.
c. This is an example of an exchange of physical assets.
d. This is an example of a money market transaction.
e. This is an example of a derivative market transaction.
a. This is an example of a direct transfer of capital.
- Which of the following statements is CORRECT?
a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.
b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.
c. Capital market instruments include both long-term debt and common stocks.
d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
e.While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
c. Capital market instruments include both long-term debt and common stocks.
- Which of the following is an example of a capital market instrument?
a. Commercial paper.
b. Preferred stock.
c. U.S. Treasury bills.
d. Banker’s acceptances.
e. Money market mutual funds.
b. Preferred stock.
- Which of the following statements is CORRECT?
a. While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
b. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
c. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks.
d. Money markets are markets for long-term debt and common stocks.
e. A liquid security is a security whose value is derived from the price of some other “underlying” asset.
b. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
- Which of the following statements is CORRECT?
a. The term “IPO” stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.
b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.
c. In a “Dutch auction,” investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.
d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed.
e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.
c. In a “Dutch auction,” investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.
- Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock’s total market value, is then calculated, and that average return is often used as an indicator of the “return on the market.”
a. True
b.False
a. True
- Which of the following statements is CORRECT?
a. The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.
b. Capital market transactions involve only preferred stock or common stock.
c. If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding.
d. Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks.
e.Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
d. Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks.
The NYSE
operates as an auction market
The NASDAQ
is an example of a dealer market
