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Exam 19: Using Securities Markets for Financing and Investing Opportunities

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Question 161

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The market price of a share of common stock depends heavily on:

A) the number of stocks traded on the New York Stock Exchange.
B) the default rate on U.S. government bonds.
C) the overall performance of the company.
D) the relative value of the U.S. dollar compared to the euro.

E) A) and B)
F) B) and C)

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Question 162

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The investor always pays a fee when purchasing a share of a mutual fund.

A) True
B) False

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Question 163

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Examples of institutional investors are pension funds, mutual funds, and insurance companies.

When investment bankers underwrite an issue, they buy at a discounted price the entire stock issue of a firm and then sell the stock, at full price, to private investors.

Securities and Exchange Commission (SEC) rules prohibit the listing of the stock of foreign firms on U.S. stock exchanges.

Bondholders represent creditors of a firm.

Each share of common stock provides the investor with a ________ right that offers the investor the first right to purchase any new shares of common stock the firm decides to issue. This allows common stockholders to maintain a proportional share of ownership in the company.

In a secondary market sale of stock, the proceeds go to the investor selling the stock, not to the corporation.

How do investment bankers generate revenues for their firms?

Having just returned from the war in Afghanistan, David has $25,000 in his savings account. His girlfriend suggests that he talk with an investment advisor and let his money "make more money." David has his eye on a new Ford truck, but realistically he knows that his old Jeep Cherokee will probably last another four years, at which time he will definitely need this money as a down payment on the purchase of something new. He knows he may have other needs as well. David should buy high-growth stock with his funds because even though they are risky, they also have the greatest potential of bringing in a better return on his investment.

The purpose of the SEC's circuit breakers rule is to:

Par value reflects the current market price for a stock.

Explain the major advantages and disadvantages of issuing stock as a source of long-term financing.

Issuing new stock increases the firm's outstanding debt on their balance sheet.

The interest rate paid to bondholders is sometimes called the coupon rate.

Which of the following situations would be considered insider trading?

Mini-Case Penny Stock is the chairperson of Pirate Recording Company Inc. She is the person responsible for the tremendous growth this company has enjoyed over the past three years. It was Penny's intuition and clever negotiating that enabled the company to sign two very hot recording artists: Half a Dollar and N'elli. These groups have generated profits of over $25 million. The future looks even brighter at the firm because several current and aspiring entertainers have indicated an interest in signing on with Pirate Recording. This incredible growth has delighted everyone at the company, but it has also created a major problem for Penny. Pirate Recording has never been a major player in the recording industry, primarily because of limited capital. In order to take the company to the next level Penny realizes that she will need to expand the firm's personnel and equipment. The amount of new funds required to finance this needed expansion is $150 million. Penny has started to consult with others about how to finance this major expansion of the company. -If stock is issued in Pirate Recording, analysts predict that the company has potential for strong growth. The prospects for dividend payments to stockholders, at least in the beginning, are not good. Pirate Recording will need to retain its earnings in order to grow rapidly. The firm's stock would most likely be classified as a(n) :

Raul and his grandfather receive individualized investment advice from the same chartered financial analyst. When comparing their customized investment recommendations, it is likely that Raul's strategy targets lower-risk investment options than the advice received by his grandfather.

Which of the following organizations provides an assessment of the relative level of risk of a particular firm's bond issue?

The higher the risk associated with a bond issue, the ________ the interest rate the organization must offer investors.