Deck 14: An Overview of Corporate Financing

Question 1

Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because
I.they can avoid the discipline of financial markets;
II.the costs of issuing new securities are high;
III.the announcement of a new equity issue is usually bad news for investors

A)I only
B)II only
C)II and III only
D)I, II, and III

Answer 1

I, II, and III

Question 2

Which of the following are not financial intermediaries?

A)Insurance companies
B)Mutual funds
C)Banking regulators
D)Venture capital funds

Answer 2

Banking regulators

Question 3

During which year have U.S. nonfinancial firms raised positive net equity?

A)2014
B)2015
C)2016
D)Net new equity has been negative from 2014 to 2017.

Answer 3

Net new equity has been negative from 2014 to 2017.

Question 4

A firm has $100 million in current liabilities, $200 million in long-term debt, $300 million in stockholders' equity, and total book assets of $600 million. There are 100 million shares outstanding with a share price of $16. Calculate the debt ratio for the firm.

A)11.1 percent
B)66.7 percent
C)50 percent
D)33 percent

Question 5

In the United Sates, who holds the smallest portion of corporate equities?

A)Households
B)Pension funds
C)Mutual funds
D)Insurance companies

Question 6

The market value of equity equals

A)(Market price)× (# of shares outstanding).
B)(Market price)× (# of treasury shares).
C)(Market price)× (# of authorized shares).
D)(Par value)× (# of shares outstanding).

Question 7

Which voting system is most friendly towards minority shareholders?

A)Majority voting
B)Cumulative voting
C)Straight voting
D)Dual-class share voting

Question 8

As a provider of funds to a corporation, owning which of the following corporate securities will give you the strongest rights to cash flow?

A)Short-term bank loan
B)Preferred stock
C)Common stock
D)Long-term bond

Question 9

Generally, nonfinancial U.S. corporations have financed their capital expenditures through

A)issuance of new equity.
B)issuance of debt.
C)increases in working capital.
D)internally generated cash.

Question 10

If you own 1,000 shares of common stock of a firm and there are five directors being elected, what is the maximum number of votes you can cast for a particular director under cumulative voting?

A)5,000
B)1,000
C)200
D)5

Question 11

Internally generated cash is calculated as

A)retained earnings minus interest payments.
B)retained earnings plus interest payments.
C)retained earnings plus depreciation.
D)retained earnings minus depreciation.

Question 12

Which of the following is NOT a sensible reason for a firm to rely on internal funds?

A)Equity issues are generally expensive.
B)A new bond issue may drive the firm's debt ratio too high.
C)Financial markets interpret the issuance of equity unfavorably.
D)All of these are sensible reasons to rely on internal funds.

Question 13

If you own 1,000 shares of stock and you can cast 5,000 votes for a particular director, then the stock features

A)cumulative voting.
B)straight voting.
C)majority voting.
D)proxy voting.

Question 14

A firm has $100 million in current liabilities, $200 million in long-term debt, $300 million in stockholders' equity, and total assets of $600 million. Calculate the firm's ratio of long-term debt to long-term debt plus equity.

A)40 percent
B)20 percent
C)50 percent
D)17 percent

Question 15

Recently, which of the following sources of funds has played the greatest role in the financing of U.S. nonfinancial firms?

A)Internal funds
B)Net equity issues
C)Net borrowing
D)All of these sources were approximately the same.

Question 16

Consider the aggregate balance sheet for manufacturing corporations in the United States. Which of the following sources of financing plays the largest role?

A)Current liabilities
B)Long-term debt
C)Stockholders' equity
D)Each of the sources plays an equal role.

Question 17

As a provider of funds to a corporation, owning which of the following corporate securities will give you the most control rights?

A)Short-term bank loan
B)Long-term bond
C)Preferred stock
D)Common stock

Question 18

Which of the following are NOT usually regarded as investment funds?

A)Mutual funds
B)Insurance companies
C)Pension funds
D)Hedge funds

Question 19

Shares held by investors are known as

A)issued but not outstanding.
B)issued and outstanding.
C)authorized shares.
D)treasury stock.

Question 20

The change in a firm's retained earnings is

A)the amount of cash that the firm has saved up.
B)the difference between the market price of the stock and the book value.
C)the difference between the net income earned and the dividends paid during a year.
D)the amount of directly contributed equity capital in excess of par value.

Question 21

A corporation has 1,000,000 shares outstanding and 10 directors are up for election. If the stock features cumulative voting, approximately how many shares do you have to muster in order to guarantee yourself a place on the board of directors? (Ignore possible ties.)

A)500,000
B)200,000
C)100,000
D)1,000,000

Question 22

The rare event in which a firm's existing directors and management compete with outsiders for the effective control of the corporation is called a

A)majority vote.
B)supermajority amendment.
C)proxy contest.
D)merger.

Question 23

The premium paid by investors to gain voting control, among the countries mentioned, is the highest in

A)the United States.
B)Mexico.
C)Italy.
D)None of these options.

Question 24

Different classes of stocks are usually issued in order to

A)maintain ownership control, by holding the class of stock with greater voting rights.
B)pay less dividends to different classes of stock.
C)extract perquisites without the other class of stockholders knowing.
D)maintain ownership control by holding the class of stock with greater voting rights and pay less dividends to different classes of stock.

Question 25

Which of the following instruments gives the owner the right to purchase securities directly from the firm at a fixed price during a specified period of time?

A)Warrant
B)Treasury stock
C)Subordinated debt
D)Short-term bank loan

Question 26

Preference in position among creditors when it comes to repayment is called

A)seniority.
B)securitization.
C)time preference.
D)absolute return.

Question 27

In the case of Facebook, which has issued Class A and Class B shares,
I.both classes of shares have the same cash-flow rights;
II.both classes of shares have the same control rights;
III.both classes of shares have different cash-flow rights;
IV.both classes of shares have different control rights

A)I and II only
B)II and III only
C)I and IV only
D)III and IV only

Question 28

Suppose a group of outsiders solicits shareholders' authority to vote shares to replace existing management. This is called

A)a tender offer.
B)a proxy contest.
C)a vote of confidence.
D)greenmail.

Question 29

A grant of authority allowing someone else to vote shares of stock that you own is called

A)repurchase agreement.
B)proxy voting.
C)share repurchase.
D)repurchase agreement and share repurchase.

Question 30

In the United States, the premium that an investor needed to pay to gain voting control was what percentage of firm value?

A)29 percent.
B)36 percent.
C)2 percent.
D)32 percent.

Question 31

When completing a large debt issue, financial managers of large firms will usually consider the following questions:
I.Should the firm borrow short term or long term?
II.Should the firm issue fixed- or floating-rate debt?
III.Should the firm borrow in foreign currency?

A)I only
B)II only
C)III only
D)I, II, and III

Question 32

If a bond is junior or subordinated, it

A)has a higher priority status than specified creditors.
B)has been issued because the company is in default.
C)must give preference to senior creditors in the event of default.
D)is secondary to equity.

Question 33

A corporate bond that can be exchanged for a fixed number of shares of stock is called a

A)callable bond.
B)debenture.
C)convertible bond.
D)warrant.

Question 34

A modification to the company charter that requires 75 percent shareholder approval for a merger is called a

A)majority voting amendment.
B)cumulative voting amendment.
C)proxy voting amendment.
D)supermajority amendment.

Question 35

The following are characteristics of preferred stock except it
I.pays fixed dividends;
II.can demand payments of cumulative dividends;
III.has voting rights

A)I only
B)I and II only
C)III only
D)II only

Question 36

Exploitation of minority shareholders by majority shareholders is called

A)a reverse stock split.
B)tunneling.
C)financial engineering.
D)proxy fighting.

Question 37

If you own 1,000 shares of common stock of a firm and there are five directors being elected, what is the maximum number of votes you can cast for a particular director under majority voting?

A)5,000
B)1,000
C)200
D)5

Question 38

Suppose a firm sets aside assets to protect particular investors. These assets are called

A)repurchased shares.
B)senior debt.
C)subordinated debt.
D)collateral.

Question 39

When securities are sold by a firm, this is termed a(n):

A)primary issue.
B)secondary transaction.
C)OTC transaction.
D)open operation.

Question 40

Which of the following statements about partnership and limited liability is (are)true?

A)All the partners in a partnership can have limited liability and general partners in a partnership cannot have limited liability.
B)All the partners in a partnership can have limited liability, general partners in a partnership cannot have limited liability, and general partners in a partnership can be corporations.
C)General partners in a partnership cannot have limited liability, general partners in a partnership can be corporations, and only limited partners in a partnership can have limited liability.
D)All the partners in a partnership can have limited liability and general partners in a partnership can be corporations.

Question 41

Which of the following investments allows investors to own assets indirectly via shares that are part of a pool of other investors?
I.REIT;
II.royalty trust;
III.option

A)I only
B)I and II only
C)I, II, and III
D)III only

Question 42

Financial intermediaries provide the following important functions for the economy: the payment mechanism, borrowing and lending, and pooling of risks.

Question 43

Debt that comes due after one year is called long-term debt.

Question 44

A warrant is a type of option.

Question 45

The following functions, provided by financial intermediaries, enable the smooth functioning of the economy:
I.processing of payments;
II.borrowing and lending;
III.pooling risks

A)I only
B)I and II only
C)I, II, and III
D)III only

Question 46

Eurobonds are almost always denominated in euros.

Question 47

LIBOR stands for London Interbank Offered Rate.

Question 48

Compared to normal bondholders, convertible bondholders have a greater interest in seeing the firm's stock price increase.

Question 49

Indicate the major sources of financing available to corporations.

Question 50

Briefly list the various functions of financial institutions.

Question 51

U.S. firms, in general, have been repurchasing shares and thus net equity issues have been negative.

Question 52

Which type of voting allows minority shareholders to allocate their votes in a manner to increase the chance of electing a director?

A)Majority voting
B)Cumulative voting
C)Representative voting
D)Executive voting

Question 53

Why do firms rely heavily on internal funds?

Question 54

Briefly explain the voting rights of shareholders.

Question 55

Briefly discuss some of the features that would increase the value of a corporate bond.

Question 56

The single European currency established by the European Union is called the euro.

Question 57

The following are debts in disguise:
I.accounts payable
II.leases
III.underfunded pensions

A)I only
B)II only
C)III only
D)I, II, and III

Question 58

Which of the following characteristics do not apply to financial intermediaries?
I.they raise money from investors;
II.they invest in financial assets;
III.they mainly invest in real assets

A)I only
B)I and II only
C)II only
D)III only

Question 59

Dual-class shares are often created to give one group of owners more control rights over the company than another group.

Question 60

Briefly explain the two different types of voting systems used for the election of the board of directors.

Question 61

Explain how shareholders might have lost control over corporations, relative to managers, over the years.