Deck 19: Using Securities Markets for Financing and Investing Opportunities

Question 1

The proceeds from a secondary market sale of securities go to the corporation whose security is being traded.

Answer 1

False

Question 2

When given a choice, businesses prefer to obtain long-term financing through retained earnings or by borrowing from a lending institution such as a bank instead of issuing stock.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Issuing bonds is considered debt financing.

Question 5

It is easier for a small business to raise funds through a stock issuance than for a large, well-known company.

Question 6

Before issuing stock or bonds, corporations must meet the disclosure requirements of the Federal Trade Commission (FTC).

Question 7

An initial public offering (IPO) represents the first time a corporation's stock is offered and sold to persons outside of the company.

Question 8

Securities markets represent the financial marketplaces for stocks and bonds.

Question 9

Only government employees represent institutional investors.

Question 10

The primary market allows an investor to purchase financial securities from other investors.

Question 11

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.

Question 12

Securities markets help companies raise long-term debt and equity financing.

Question 13

An investment banking firm assists corporations in selling the new security issue.

Question 14

Investment bankers assist in the issuing and selling of new securities.

Question 15

Corporations sell a new issuance of securities in the primary market.

Question 16

Many observers suggest that the stock market is dominated by the buying and selling activities of institutional investors.

Question 17

Issuing stock is considered equity financing.

Question 18

The secondary market is where investors (both individuals and companies) go to find someone who is interested in selling their investments to them.

Question 19

Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.

Question 20

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

Question 21

Game Guys, Inc. needs several million dollars in order to expand and become the international company that it says it wants to be in its strategic plan. After consulting with an investment banker who is willing to underwrite the issue, it learned that investors will purchase the stock for $32/share. Game Guys will receive a smaller amount for each share that is sold.

Question 22

Jason, a stockbroker at Securitas Financial Services, called you the other day asking if you would like to purchase an IPO. "The hot new company, Leafy Greens, is going public, and I thought you might want to get in on it," he exclaimed. If you agree to buy shares of this company, this trade will occur on the secondary market.

Question 23

The Securities and Exchange Commission does not intercede in any way in the process of an IPO. Doing so would disrupt the natural process of the capital markets.

Question 24

Your company is privately held but needs additional funding for a planned expansion. Having never issued stock to the public, your firm is well advised to seek the assistance of an investment banker prior to an initial public offering of stock.

Question 25

The stock of companies that fail to meet a stock exchange's minimum requirements can be delisted.

Question 26

Stocks that are not listed as trading on one of the national or international stock exchanges can be traded on the OTC, over-the-counter exchange.

Question 27

Only those with a membership on a stock exchange can buy and sell securities on that stock exchange.

Question 28

Investment bankers are in the business of underwriting securities. They profit from purchasing the new stock offering of a corporation at a discount, and then selling those shares of stock to the public at the market price.

Question 29

The NASDAQ is a floor-based exchange.

Question 30

Corporations receive needed funds when they sell a new issuance of a security in the primary market.

Question 31

If an investor, Cora, buys a share of stock in Epic Electronics from another investor, Nathan, Epic Electronics automatically receives a fixed percentage of the selling price.

Question 32

Leafy Greens wants to raise an undisclosed amount of funds in order to expand the company-owned vegetarian restaurants overseas. The CFO of the company will negotiate with an expert at the FTC who will underwrite the issue of stock that Leafy Greens plans to offer.

Question 33

The over-the-counter market utilizes an electronic securities trading system.

Question 34

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

Question 35

Institutional investors include insurance companies, individual investors, and mutual funds.

Question 36

A stock exchange provides a marketplace where the public can directly buy and sell securities without the need for a membership.

Question 37

Government employees, public school system employees, and even employees of some large companies pay a percentage of their monthly earnings into pension funds. These funds collect a large pool of money that they invest in securities. Large organizations-such as pension funds, mutual funds, and insurance companies-that invest their own funds or the funds of others into stocks, bonds, or other securities are called institutional investors.

Question 38

Investors who trade securities buy securities they are interested in holding or sell securities to make a profit or cut losses by trading in the secondary market.

Question 39

Katherine inherited $35,000 when her grandfather died and decided to invest it in the Leafy Greens restaurants. As a student of business, you inform her that she can call a stockbroker who will help her purchase stock on the secondary market.

Question 40

Stock exchanges compete with each other for the listing of a corporation's stock.

Question 41

Insider trading laws prevent employees from buying or selling the securities of their employers.

Question 42

According to the Securities Act of 1933 it is against the law for a firm that is publicly trading securities to deny an investor from knowing how the firm is doing financially.

Question 43

Dividends represent a portion of a firm's profits that are distributed to bondholders first then stockholders.

Question 44

The prospectus is summarization of the results of detailed financial documents that a firm files with the SEC prior to being given approval to issue securities.

Question 45

The Federal Trade Commission (FTC) regulates the security markets in the United States.

Question 46

According to the Connecting Through Social Media box, one goal of the JOBS Act of 2012 (Jumpstart Our Business Startups Act) is to make crowdinvesting more accessible to small businesses.

Question 47

With recent mergers of stock exchanges, beginning with the New York Stock Exchange merger with Archipelago, and subsequently with Euronext and eventually the Intercontinental Exchange (ICE) in Atlanta purchase of the NYSE Euronext for $8.2 billion. Most exchange floors are symbolic because trades today usually take place on computers.

Question 48

Before a corporation's stock can be sold on a major stock exchange, the firm must provide detailed financial information to the Securities and Exchange Commission (SEC).

Question 49

Insider trading involves the sale of stock to employees at discounted prices.

Question 50

Avery, an executive assistant at the Newport Group, photocopied documents detailing a major merger that will be finalized in two weeks. Avery is thrilled to read about the merger, plans to call her broker immediately and buy stock in the company, and suggests that you should also act on her stock tip. Since you are not employed at her firm your purchase is legal.

Question 51

Although companies that issue bonds are required to pay interest, companies issuing stock are not required to pay dividends.

Question 52

The number of U.S. companies that are listed on foreign stock exchanges is declining.

Question 53

Par value reflects the current market price for a stock.

Question 54

The Securities and Exchange Commission (SEC) requires that all prospective investors receive a copy of a firm's prospectus prior to investing.

Question 55

In an effort to profit from stock market trading, Tony landed a job with the Newport Group. Tony intends to use his position to obtain privileged information about his new employer that would not be available to the public. While he realizes that he may be benefiting unfairly, he is not acting illegally because he is an employee.

Question 56

Stock certificates identify per share dividends, expressed as a percentage of par value.

Question 57

Once a stock exchange agrees to list a company, the firm can be assured that it will always be listed by that exchange.

Question 58

Well-known foreign exchanges that also exchange the securities of U.S. firms include the Sydney Exchange and the Tokyo Exchange.

Question 59

Stocks represent shares of ownership in a company.

Question 60

Insider trading refers to someone who benefits unfairly from information about a security not available to the general public.

Question 61

Preferred stockholders have voting rights, privileges not shared by common stockholders.

Question 62

The similarities between common stocks and bonds include a face or par value and a fixed rate of return for investors.

Question 63

Preferred stockholders receive dividend payments before common stockholders are paid any dividends.

Question 64

Preemptive rights provide common stockholders the first right to purchase any new shares of common stock issued by the firm.

Question 65

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

Question 66

Both preferred stocks and bonds represent funding sources that require repayment to investors.

Question 67

A preferred stock's par value establishes the base used for calculating the preferred stockholders' dividend.

Question 68

For the firm, the cost of paying dividends to common stockholders is higher than the cost of the same amount of interest paid to bondholders.

Question 69

Corporations that issue preferred stock incur a legal obligation to pay dividends to those stockholders.

Question 70

If the firm should find itself in bankruptcy, preferred stockholders would have claim to the value of any remaining assets before common stockholders.

Question 71

Cumulative preferred stockholders enjoy a promise that missed dividends will accumulate and be paid later, before any dividends are paid to common stockholders.

Question 72

When a corporation enjoys a profitable year, dividends must be paid.

Question 73

While common stockholders of corporations have voting rights, preferred stockholders generally do not.

Question 74

If paid, dividends come from any profits remaining after the firm has paid taxes. The company cannot deduct dividends as an expense of doing business.

Question 75

Preferred stock may include callable and convertible provisions.

Question 76

Cumulative preferred stockholders enjoy the first right to purchase any new shares of stock issued by the firm.

Question 77

Issuing new common stock usually expands ownership, giving all owners the right to vote for the firm's board of directors.

Question 78

Preferred stockholders possess the first right to purchase any new stock the company issues.

Question 79

Corporate management decisions are influenced by the desire to keep stockholders happy.

Question 80

A company with cash flow shortages must pay common stockholders their dividends before paying preferred stockholders their dividends.