Deck 14: An Overview of Corporate Financing

Question 1

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

A) 40%
B) 20%
C) 50%
D) None of the above

Answer 1

50%

Question 2

On the average, firms (manufacturing sector) of the following countries have about average levels of debt ratio (after adjusting for accounting differences) except:

A) USA
B) Austria
C) Spain
D) Germany

Answer 2

Germany

Question 3

Retained earnings are:

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

Answer 3

The difference between the net income earned and the dividends paid during a year

Question 4

Internally generated cash is calculated as:
I. Retained earnings
II. Interest payments
II. Depreciation

A) (I - II)
B) (I + II)
C) (I + III)
D) (I - III)

Question 5

The market value of equity is calculated as:

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 6

Total capitalization is defined as:

A) Total long-term liabilities plus stockholders' equity
B) Total debt plus stockholders' equity
C) Total debt minus stockholders' equity
D) Current liabilities and stockholders' equity

Question 7

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

A) 40%
B) 20%
C) 50%
D) None of the above

Question 8

Maximum number of shares that can be issued by a firm is called

A) Treasury stock
B) Outstanding shares
C) Authorized shares
D) None of the above

Question 9

Capital surplus usually refers to:

A) The stock's par value
B) The accumulated retained earnings during the life of the corporation
C) The amount of stock repurchased
D) The amount of directly contributed equity capital in excess of par value

Question 10

Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because:
I. They can avoid the discipline of the financial markets
II. The costs of issuing new securities are high
III. The announcement of 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

Question 11

Shares of stock that have been repurchased by the corporation are called

A) Authorized shares
B) Repurchase agreements
C) Treasury stock
D) Retained equity

Question 12

Shares held by the investors are known as:

A) issued but not outstanding
B) issued and outstanding
C) authorized shares
D) none of the above

Question 13

On the average, firms of the following countries have higher levels of debt ratios (after adjusting for accounting differences) except:

A) France
B) Netherlands
C) Germany
D) Italy

Question 14

Generally (during the years 1989-2006), non-financial US corporations have financed their capital expenditures mostly through:

A) By issuing new equity
B) Debt
C) Working capital
D) Internally generated cash

Question 15

What percentage of corporate financing (non-financial) is made up of internal funds for firms in the U.S.A.?

A) 75% (approximately)
B) 50% (approximately)
C) 25% (approximately)
D) none of the above

Question 16

Internal funds make up more than two-thirds of corporate financing in the following countries:
I. The United States
II. U.K.
III. Germany
IV. Japan

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

Question 17

The equity accounts of Bio-Tech Company is as follows: Suppose the firm sells 2,000,000 new (additional) shares at a price of $20 per share. What is the new value of Common Shares account?

A) 12,000,000
B) 10,000,000
C) 2,000,000
D) None of the above

Question 18

On the average, firms (manufacturing industry) of the following countries have lower levels of debt ratio (after adjusting for accounting differences) except:

A) Japan
B) Netherlands
C) Finland
D) Italy

Question 19

The maximum number of shares a firm can issue is known as:

A) issued but not outstanding
B) issued and outstanding
C) authorized shares
D) none of the above

Question 20

Generally, the book value of the shareholders' equity is represented by:

A) The total assets minus the current liabilities
B) The total assets minus the net worth
C) The sum of preferred stock, debt and the capital surplus
D) The sum of the par value of common stock, the capital surplus and the accumulated retained earnings

Question 21

Bio-Tech Company has had a very successful year and earnings are $21million. The company has 12 million shares outstanding and will pay a dividend of $1.00/share. The old value of retained earnings account is 125 million. What is the retained earnings for the year and the new value of retained earnings account?

A) $21 million & $146 million
B) $9 million & $134 million
C) $12 million & $137 million
D) None of the above

Question 22

Stockholders usually have the following rights:

A) To elect board members, authorize issue of new shares and vote on matters of great importance like mergers
B) To share proportionally in regular and liquidating dividends
C) To share proportionally in any new stock sold
D) All of the above

Question 23

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) None of the above

Question 24

Minority shareholders can also be represented on the board of directors under:

A) Majority voting
B) Cumulative voting
C) Straight voting
D) None of the above

Question 25

A grant of authority allowing someone else to vote shares of stock that you own is called a:
I. Power of share authorization
II. Proxy voting
III. Restricted conveyance

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

Question 26

Different classes of stocks are usually issued to:
I. Maintain ownership control by holding the class of stock with greater voting rights
II. Pay less in dividends between the classes of stock
III. To extract prerequisites without the other class of stockholders knowing

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

Question 27

Exploitation of minority shareholders by the majority shareholders is called:

A) reverse stock split
B) tunneling
C) exploitation
D) none of the above

Question 28

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

A) Households
B) Institutional investors
C) Foreign entities
D) None of the above

Question 29

In the United States the premium that an investor needed to pay to gain voting control is:

A) 29%
B) 36%
C) 2%
D) none of the above

Question 30

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) None of the above

Question 31

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) None of the above

Question 32

The equity accounts of Bio-Tech Company is as follows: Suppose that the firm sells 2,000,000 new shares at a price of $20/share. What is the new value of the additional paid-in-capital account?

A) $144,000,000
B) $40,000,000
C) $88,000,000
D) $70,000,000

Question 33

The following are characteristics of preferred stock except:
I. pays fixed dividends
II. has cumulative feature
III. has voting rights

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

Question 34

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

A) majority voting
B) supermajority amendment
C) proxy contest
D) none of the above

Question 35

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

A) U.S.A.
B) Mexico
C) Italy
D) None of the above

Question 36

Which of the following statements about partnership and limited liability is(are) true? I) all the partners in a partnership can have limited liability
II) general partners in a partnership cannot have limited liability
III) general partners in a partnership can be corporations
IV) only limited partners in a partnership can have limited liability

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

Question 37

If a group of outsiders solicits the authority to vote shares to replace existing management, then it is called a:

A) Tender offer
B) Proxy contest
C) Vote of confidence
D) None of the above

Question 38

A modification to the company charter that requires 75% shareholder approval for a merger is called a(n):

A) Majority voting amendment
B) Cumulative voting amendment
C) Proxy voting amendment
D) Supermajority amendment

Question 39

In the case of Google, 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) none of the above

Question 40

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) None of the above

Question 41

US dollars deposited in a German bank are called:

A) Deutsche dollars
B) American depositing receipts
C) Eurodollars
D) None of the above

Question 42

The following functions are provided by financial intermediaries for the smooth functioning of the economy:
I. The payment mechanism II) Borrowing and lending
III. Pooling risk

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

Question 43

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 44

LIBOR stands for London Interbank Offered Rate.

Question 45

The single European currency established by European union is called "Euro."

Question 46

The following are debt in disguise except:

A) accounts payable
B) lease
C) unfounded obligations
D) all of the above are debt in disguise

Question 47

The following are the main characteristics of financial intermediaries except:
I. they may raise money in special ways
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 48

Which of the following investments allows investors to own assets indirectly via shares that are part of a pool of other investors?
I. RIET II) Trust
III. Option

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

Question 49

A firm cannot finance a long-term project using short-term debt.

Question 50

Debt that may be extinguished before maturity is referred to as:

A) Sinking-fund
B) Debentures
C) Unfunded debt
D) Callable debt

Question 51

Dollars deposited in the USA by Europeans are called Eurodollars.

Question 52

Debt due after one year or more is called long-term debt.

Question 53

When an entire security issue is directly sold to qualified institutional investors, such an issue is called a:

A) Public issue
B) Private placement
C) Securitization
D) Commercial paper

Question 54

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

A) Seniority
B) Security
C) Liquidation preference
D) Absolute priority

Question 55

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 56

A floating-rate loan is the opposite of a sinking fund.

Question 57

The maximum number of shares that can be used is known as the authorized share capital.

Question 58

When new securities are sold by a firm, it is called

A) Primary market transaction
B) Secondary market transaction
C) O-T-C market transaction
D) None of the above

Question 59

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) Call option
C) American option
D) European option

Question 60

If a debenture 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 the senior creditors in the event of default
D) Is secondary to equity

Question 61

Shareholders have more influence over who sits on the board of directors than the firm
CEO.

Question 62

Briefly explain different types of financial markets.

Question 63

Financial intermediaries provide the following important functions for the economy ¾ the payment mechanism, borrowing and lending, and pooling risk.

Question 64

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

Question 65

Why do firms rely heavily on internal funds?

Question 66

A warrant is nothing but an option.

Question 67

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

Question 68

Indicate important sources of finance available to corporations.

Question 69

Briefly explain various functions of financial institutions.

Question 70

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

Question 71

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

Question 72

Briefly explain the voting rights of the shareholders.