The Principle of Financing

A bond issue may be retired by:

• A. calling the bonds if there is a call feature.

• B. converting the bonds (if convertible) into common stock.

• C. making a single-sum payment at final maturity.

• D. All of the above.

Protective covenants are:

• A. to protect employees.

• B. to protect the interests of the company.

• C. to protect shareholders.

• D. to protect bondholders.

Which of the following offer the investor the most protection?

• A. First-mortgage (secured) bonds

• B. Debentures

• C. Convertible bonds

• D. Floating Rate bonds

A company refunds its bonds for any of the following reasons EXCEPT for:

• A. to eliminate restrictive covenants.

• B. to reduce interest costs.

• C. to show higher reported profits.

• D. to issue new bonds at higher rate of interest.

Preferred shareholders' claims on assets and income of a firm come……. those of creditors ……… those of common shareholders.

• A. before; and also before

• B. after; but before

• C. after; and also after

• D. equal to; and equal to

Dual classes of …… are common in new ventures where promotional…… usually goes to the founders.

• A. bonds; bonds

• B. stock; preferred stock

• C. stock; common stock

• D. warrants; warrants

In the United States, most bonds pay interest ……. a year, while many European bonds pay interest ………. a year.

• A. once; twice

• B. twice; once

• C. once; once

• D. twice; twice

If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?

• A. The stock has a low level of risk.

• B. The stock offers a high dividend payout ratio.

• C. The market is undervaluing the stock.

• D. The market is overvaluing the stock.

In an initial public offering, the subscription price is generally:

• A. set equal to the current market price of the stock.

• B. set below the current market price of the stock.

• C. set above the current market price of the stock.

• D. Cannot say

To say that there is "asymmetric information" in the issuing of common stock or debt means that :

• A. investors have nearly perfect information.

• B. the markets have nearly perfect information.

• C. investors have more accurate information than management has.

• D. management has more accurate information than investors have.