Textbook concept questions Flashcards
The systematic risk of the market is represented by: A beta of 0.0. A beta of 1.0. A standard deviation of 1.0. A variance of 1.0. A standard deviation of 0.0.
A beta of 1.0.
Which of the following best defines the term overallotment option?
Allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price.
A company’s first equity issue made available to the public. Also an unseasoned new issue.
The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.
Loans, usually long term in nature, provided directly by a limited number of investors.
An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.
An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.
The secondary market is:
a The market for the original sale of securities by governments and corporations.
b The market in which securities are bought and sold after original sale.
c The market in which dealers buy and sell for themselves, at their own risk.
d The market in which purchasers are matched with those who wish to sell.
e A market which has no central Location.
b
The market in which securities are bought and sold after original sale.
Which one of the following statements is correct concerning the differences between preferred and common stock?
a Common stock is a form of equity while preferred stock is a form of debt from a legal standpoint.
b Common shareholders generally have more control over a corporation than preferred shareholders.
c Preferred shares carry voting rights while common shares do not.
d Common shareholders have first right of priority after creditors in liquidation.
e Common dividends in arrearage must be paid prior to any additional preferred stock dividends.
b
Common shareholders generally have more control over a corporation than preferred shareholders.
Working capital management refers to: The types of stock issued. The amount of Long-term debt. The levels of cash and inventory held. The types of Long-term investments made. The mixture of debt and equity.
The mixture of debt and equity.
From a tax-paying investor’s point of view, a stock repurchase:
Creates a tax liability even if investors do not sell any of the shares they own.
Is more desirable than a cash dividend.
Is equivalent to a cash dividend.
Is more highly taxed than a cash dividend.
Has the same tax effects as a cash dividend.Is more desirable than a cash dividend.
Is more desirable than a cash dividend.
The residual dividend approach is defined as the policy of paying dividends:
Only if excess funds remain after the net working capital requirements of the firm have been met while maintaining a constant debt-equity ratio.
Only after all the cash needs of the firm have been met and the debt-equity ratio has been reduced to zero.
Based on the operating cash flows which remain after all expenses and taxes have been paid.
Equal to the after-tax proceeds from the sale of a portion of the business entity.
Only after the investment needs of the firm are met while maintaining a constant debt-equity ratio.
Only after the investment needs of the firm are met while maintaining a constant debt-equity ratio.
Which one of the following statements concerning bond ratings is correct?
Investment grade bonds include only those bonds receiving one of the highest three bond ratings.
Bond ratings are solely an assessment of the creditworthiness of the bond issuer.
Bond ratings evaluate the expected price volatility of a bond issue.
All bonds receive the same rating classification from all rating agencies.
Standard and Poor’s and Value Line are the primary bond rating agencies.
Bond ratings are solely an assessment of the creditworthiness of the bond issuer.
Which of the following best defines the term lockup agreement?
A company’s first equity issue made available to the public. Also an unseasoned new issue.
Allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price.
An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.
Loans, usually long term in nature, provided directly by a limited number of investors.
The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.
The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.
You have discovered from looking at charts of past stock prices that if you buy just after a stock price has declined for three consecutive days, you make money every time! This is a violation of \_\_\_\_\_\_\_\_ market efficiency. semi-strong form strong form weak form TSX stock semi-weak form
weak form
Individuals that continually monitor the financial markets seeking mispriced securities:
a Tend to make substantial profits on a daily basis.
b Are never able to find a security that is temporarily mispriced.
c Tend to make the markets more efficient.
d Are always quite successful using only well-known public information as their basis of evaluation.
e Are always quite successful using only historical price information as their basis of evaluation.
Tend to make the markets more efficient.
The risk premium for an individual security is computed by:
Dividing the market risk premium by the beta of the security.
Adding the risk-free rate to the security’s expected return.
Multiplying the security’s beta by the risk-free rate of return.
Multiplying the security’s beta by the market risk premium.
Dividing the market risk premium by the quantity (1 - beta).
Multiplying the security’s beta by the risk-free rate of return.
Which of the following is a possible motivation for a reverse stock split?
Avoid falling below the minimum listing requirements of a stock exchange.
Force out minority shareholders.
Decrease the stock price and, thereby, increase the stock’s marketability.
Increase the transaction costs of shareholders.
Decrease the book value of the stock.
Avoid falling below the minimum listing requirements of a stock exchange.
Which of the following is the best definition for the concept of efficient capital market?
The hypothesis is that actual capital markets are efficient.
The excess return required from an investment in a risky asset over a risk-free investment.
A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard deviation.
The average compound return earned per year over a multi-year period.
Market in which security prices reflect available information.
Market in which security prices reflect available information.
The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. Date of declaration. Date of ex-rights. Date of payment. Date of record. Date of ex-dividend.
Date of record.
Which of the following best defines the term venture capital?
Underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility.
A group of underwriters formed to reduce the risk and help to sell an issue.
Financing for new, often high-risk ventures.
Direct business loans of, typically, one to five years.
Loans made by a group of banks or other institutions.
Financing for new, often high-risk ventures.
Diversifiable risks: Affect the entire market. Are measured by beta. Are rewarded in the market place. Are also referred to as unique risks. Are systematic in nature.
Are also referred to as unique risks.
If investors are uncertain that a corporate bond issuer will make all of the bond payments as promised, the investors will demand a higher yield in the form of: An increased interest rate risk premium. An increased liquidity risk premium. An increased inflation premium. An increased default risk premium. An increased real rate of interest.
An increased default risk premium.
