Deck 14: An Overview of Corporate Financing

Question 1

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

A)short-term bank loan
B)long-term bond
C)preferred stock
D)common stock

Answer 1

short-term bank loan

Question 2

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 the these are sensible reasons to rely on internal funds.

Answer 2

All of the these are sensible reasons to rely on internal funds.

Question 3

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

A)authorized shares.
B)repurchase agreements.
C)Treasury stock.
D)retained equity.

Answer 3

Treasury stock.

Question 4

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 5

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 6

Shares held by investors are known as:

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

Question 7

The 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 options.

Question 8

Internally generated cash is calculated as:
i.retained earnings; II)interest payments; III)depreciation

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

Question 9

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 the sources were approximately the same

Question 10

Investors who purchased shares from the Facebook IPO did so in which market?

A)primary market
B)secondary market
C)over-the-counter market
D)NYSE

Question 11

Typically,the book value of shareholders' equity equals:

A)total assets minus current liabilities.
B)total assets minus net worth.
C)the sum of preferred stock,debt,and the par value of equity.
D)the sum of the par value of common stock,additional paid-in capital,and accumulated retained earnings.

Question 12

Consider the aggregate balance sheet for manufacturing corporations in the U.S.Which of the following sources of financing plays the smallest role?

A)current liabilities
B)long-term debt
C)stockholders' equity
D)Each of the sources plays an equal role.

Question 13

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

A)40%
B)20%
C)50%
D)33%

Question 14

Internal funds constitute the majority of corporate financing in the following countries:
I.U)S.
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 15

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

A)2007
B)2008
C)2009
D)net equity has been negative from 2007 to 2009

Question 16

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

Question 17

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 18

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 19

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

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

Question 20

A firm has $100 million in current liabilities,$200 million in total long-term liabilities,$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%
B)20%
C)50%
D)17%

Question 21

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 22

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

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

Question 23

Exploitation of minority shareholders by majority shareholders is called:

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

Question 24

Different classes of stocks are usually issued in order to:
I.maintain ownership control,by holding the class of stock with greater voting rights;
II.pay less dividends to different classes of stock;
III.extract perquisites without the other class of stockholders knowing

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

Question 25

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 26

Stockholders usually have the following rights:
I.to elect board members,authorize issue of new shares,and vote on matters of great importance like mergers;
II.to share proportionally in regular and liquidating dividends;
III.to share proportionally in any new stock sold

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

Question 27

Which of the following are NOT financial intermediaries?

A)insurance companies
B)mutual funds
C)banking regulators
D)venture capital funds

Question 28

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

A)U.S.
B)Mexico.
C)Italy.
D)none of the options.

Question 29

The following are characteristics of preferred stock except:
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 30

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

A)mutual funds
B)insurance companies
C)pension funds
D)hedge funds

Question 31

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 32

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 33

A grant of authority allowing someone else to vote shares of stock that you own is called:
i.repurchase agreement; II)proxy voting; III)share repurchase

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

Question 34

A modification to the company charter that requires 75% 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

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)III and IV only

Question 36

Which voting system is most friendly towards minority shareholders?

A)majority voting
B)cumulative voting
C)straight voting
D)dual-class share voting

Question 37

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

A)households
B)pension funds
C)mutual funds
D)insurance companies

Question 38

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 39

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 40

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 41

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

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

Question 42

The par value of a firm's stock has little economic significance.

Question 43

LIBOR stands for London Interbank Offered Rate.

Question 44

The following are the main characteristics of financial intermediaries except:
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 45

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 46

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

Question 47

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

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

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.REIT; II)trust; III)option

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

Question 49

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 50

U.S.dollars deposited in a German bank are called:

A)Deutsche dollars.
B)American depositing receipts.
C)Eurodollars.
D)mark dollars.

Question 51

Eurobonds are almost always denominated in euros.

Question 52

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 53

The maximum number of shares that a firm can issue is known as authorized shares.

Question 54

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

Question 55

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 56

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 57

When new securities are sold by a firm,it is termed a:

A)primary market transaction.
B)secondary market transaction.
C)OTC market transaction.
D)Open market operations.

Question 58

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

Question 59

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 60

When completing a large debt issue,financial managers of large firms will usually consider the following questions EXCEPT:
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 61

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

Question 62

A warrant is a type of option.

Question 63

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

Question 64

Briefly list the various functions of financial institutions.

Question 65

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

Question 66

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

Question 67

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

Question 68

Briefly describe the different types of financial markets.

Question 69

Indicate the major sources of finance available to corporations.

Question 70

Why do firms rely heavily on internal funds?

Question 71

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

Question 72

Briefly explain the voting rights of shareholders.