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WorksheetsFM 1
Total questions: 135
Worksheet time: 5hrs 30mins
the market price per share of the firm's common stock
the book value of the firm's assets less the book value of its liabilities
the amount of salary paid to its employees
the number of people employed in the firm
maximize earnings per share
maximize market share
maximize the value of the firm's common stock
maximize return on investment
What is the best dividend policy?
What is the optimal firm size?
What is the best financing mix?
What is the best type of financing?
Money Market
Capital Market
Primary Market
Secondary Market
allocation of funds to current and capital assets
obtaining the best mix of financing alternatives
development of an appropriate dividend policy
preparation of the firm's accounting statements
Foreign stocks
Consumer automobile loans
U S stocks
Short-term debt securities
the board of directors of the firm
the president of the company
individuals buying and selling the stock
the stock exchange on which the stock is liste
Money market instruments include:
Preferred stock
Corporate bonds
Bankers’ acceptances
Common stock
The gross profit margin is unchanged, but the net profit margin declined over the same period This could have happened if
sales increased relative to expenses
dividends were decrease
Govt increased the tax rate
cost of goods sold increased relative to sales
The principal advantage of the sole proprietorship form of business organization is:
Single tax filing on individual form
Unlimited liability
Hard to raise additional capital
Transfer of ownership difficulties
__ is the price at which the bond is traded in the stock exchange
Redemption value
Face value
Maturity value
Market value
The current price at which the stock is currently trading is:
Liquidating Value (per share)
Market Value (per share)
Book Value (per share)
Par Value – The face value
__ enhance the market value of shares and therefore equity capital is not free of cost
Redemption value
Dividends
Face value
Book value
The amount of current assets that varies with seasonal requirements is:
Permanent current assets
Temporary fixed assets
Permanent fixed assets
Temporary current assets
Which of the following are not among the daily activities of financial management
sale of shares and bonds
credit management
inventory control
the receipt and disbursement of funds
__ and __ are the two versions of goals of the financial management of the firm
Sales maximisation, Profit maximization
Value maximisation, Wealth maximisation
Profit maximisation, Wealth maximization
Production maximisation, Sales maximisation
__ refers to the amount invested in various components of current assets
Gross working capital
Temporary working capital
Net working capital
Permanent working capital
__ is the length of time between the firm's actual cash expenditure and its own cash receipt
Cash conversion cycle
Working capital cycle
Gross operating cycle
Net operating cycle
A(n)__ _ would be an example of a principal, while a(n)__ would be an example of an agent
manager; owner
accountant; bondholder
shareholder; manager
shareholder; bondholder
__ is NOT a part of Current Assets
Accounts Payable
Cash
Accounts Receivable
Inventory
Net Working Capital is:
Current Assets - Current Liabilities
Current Assets + Current Liabilities
Current Assets / Current Liabilities
Current Liabilities - Current Assets
___ refers to the length of time allowed by a firm for its customers to make payment for their purchases
Pay-back period
Average collection period
Credit period
Holding period
The amount of current assets required to meet a firm's long-term minimum needs
Temporary fixed assets
Permanent current assets
Permanent fixed assets
Temporary current assets
How are earnings per share calculated?
Use the income statement to determine earnings after taxes (net income) and divide by the number of common shares outstanding
Use the income statement to determine earnings after taxes (net income) and divide by the previous period's earnings after taxes Then subtract 1 from the previously calculated value
Use the income statement to determine earnings after taxes (net income) and divide by the number of common and preferred shares outstanding
Use the income statement to determine earnings after taxes (net income) and divide by the forecasted period's earnings after taxes Then subtract 1 from the previously calculated value
__ is a part of Current Liabilities
Cash
Accounts Receivable
Inventory
Accounts Payable
Which of the following working capital strategies is the most aggressive?
Making greater use of short term finance and minimizing net short term asset
Making greater use of short term finance and maximizing net short term asset
Making greater use of long term finance and minimizing net short term asset
Making greater use of long term finance and maximizing net short term asset
Permanent working capital
is the amount of current assets required to meet a firm's long-term minimum needs
varies with seasonal needs
includes fixed assets
includes accounts payable
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short- term debt is considered to be a(an) ___ current operating asset financing strategy because of the inherent risks of using short-term financing
conservative
wrong
aggressive
maturity matching
A (n) ___ _ current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities
conservative
aggressive
maturity matching
wrong
A firm's operating cycle is equal to its inventory turnover in days (ITD)
plus its receivable turnover in days (RTD)
minus its RT
plus its RTD minus its payable turnover in days (PTD)
minus its RTD minus its PT
Which of the following would be consistent with a more aggressive approach tofinancing working capital?
Financing short-term needs with short-term funds
Financing permanent inventory buildup with long-term debt
Financing seasonal needs with short-term funds
Financing some long-term needs with short- term funds
In deciding the appropriate level of current assets for the firm, management is confronted with
a trade-off between liquidity and marketability
a trade-off between short-term versus long- term borrowing
a trade-off between profitability and risk
a trade-off between equity and debt
The mix between short-term and long-term debt must consider:
Industry norms
Customer satisfaction
Cost of equity
Hobby of CFO
Firms generally choose to finance temporary current operating assets with short- term debt because
matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital
short-term interest rates have traditionally been more stable than long-term interest rates
a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term
short-term debt has a higher cost than equity capital
Other things held constant, which of the following will cause an increase in net working capital?
A cash dividend is declared and pai
Long-term bonds are retired with the proceeds of a preferred stock issue
Merchandise is sold at a profit, but the sale is on credit
Cash is used to buy marketable securities
XYZ is an oil based business company, which does not have adequate working capital It fails to meet its current obligation, which leads to bankruptcy Identify the type of decision involved to prevent risk of bankruptcy
Investment decision
Dividend decision
Finance decision
Liquidity decision
The principal advantage of Maturity matching approach in financing strategy is that:
Reduces liquidity risk
Easy to implement in practice
Hard to implement in practice
High proportion of short term debt
The principal advantage of Conservative approach in financing strategy is that:
Uncertain regarding future interest costs
Less worry in refinancing short-term obligations
Borrowing at a higher overall cost
Borrowing more than what is necessary
Marketable securities are primarily
short-term debt instruments
short-term equity securities
long-term debt instruments
long-term equity securities
Pick the 2 types of short term financing available to organisations.
Bank overdraft.
Accruals.
Loans.
Financial Leasing.
These are activities related in the generation of the principal revenue of the firm
Investing Activities
Financing Activities
Operating Activities
All of the above
____ represent the cost that shareholders bear due to managers’ pursuit of their own interests
Shareholder
Stakeholder
Expenses
Agency problem
An investment is lucrative when:
The equity IRR is higher than NPV to equity capital providers
The NPV is higher than cost of investment
The equity IRR is higher than cost of equity
The NPV to equity capital providers is higher than cost of equity
Internal Rate of Return (IRR) to equity capital providers is equal:
The hurdle rate of return to equity capital providers
The cost of equity
The actual return on equity capital
The total discounted free cash flows to equity capital providers
The mix between short-term and long-term debt must consider:
Variability of sales
Customer satisfaction
Cost of equity
Hobby of CFO
The mix between short-term and long-term debt must consider:
Customer satisfaction
Hobby of CFO
Variability of cash flows
Cost of equity
Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?
Reducing current assets, increasing current liabilities, and reducing long-term debt
Increasing current assets while lowering current liabilities
Increasing current assets while incurring more current liabilities
Replacing short-term debt with equity
__ varies inversely with profitability
Risk
Liabilities
Liquidity
Financing
When total current assets exceeds total current liabilities it refers to
Net Working Capital
Gross Working Capital
Temporary Working Capital
Temporary Current Assets
Which of the following would NOT be financed from working capital?
Credit sales
A new personal computer for the office
Accounts receivable
Cash float
Which of the following statements is CORRECT?
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing
Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increase
If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt
Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decrease
__ _ refers to a firm holding some cash to meet its routine expenses that are incurred in the ordinary course of business
Transaction motive
Speculative motive
Precautionary motive
Compensating motive
The first priority item in choosing marketable securities is:
Expected return and ability to sell quickly without significant price concession
Longer maturities and higher rate of return
Higher rate of return
Lowest risk and ability to sell quickly without significant price concession
Other things held constant, which of the following would tend to reduce the cash conversion cycle?
Continue to take all discounts that are offered and pay on the net date
Carry a constant amount of receivables as sales decline
Place larger orders for raw materials to take advantage of price breaks
Offer longer payment terms to customers
Cash management decisions must consider the risk versus expected return trade-offs from alternative policies because:
Too little cash reduce risk; too much cash reduces return
Too little cash increases risk; too much cash increases return
Too little cash increases risk; too much cash reduces return
Too little cash reduces risk; too much cash increases return
Which would be an appropriate investment for temporarily idle corporate cash that will be used to pay quarterly dividends three months from now?
Ninety-day commercial paper with a current annual yield of 6 2 percent
A long-term AAA-rated corporate bond with a current annual yield of 9 4 percent
A 30-year Treasury bond with a current annual yield of 8 7 percent
Common stock that has been appreciating in price 8 percent annually, on average, and paying a quarterly dividend that is the equivalent of a 5 percent annual yiel
Which of the following marketable securities is the obligation of a commercial bank?
Negotiable certificate of deposit
Commercial paper
Repurchase agreement
T-bills
Credit policy of every company is largely influenced by__ _ and__ _
Liquidity, profitability
Liquidity, accountability
Liability, profitability
Liability, liquidity
Helena Furnishings wants to reduce its cash conversion cycle Which of the following actions should it take?
Take steps to reduce the Days sales outstanding – DSO
Increase average inventory without increasing sales
Start paying its bills sooner, which would reduce the average accounts payable but not affect sales
Sell common stock to retire long-term bonds
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
Payments lags
Repurchases of common stock
Payment for plant construction
Depreciation
Which of the following actions would be likely to shorten the cash conversion cycle?
Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50
Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days
a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days
Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30
Amounts due from customers when goods are sold on credit are called __ _
Trade debits
Trade balance
Trade discount
Trade off
The management of an organization performs several broad functions. They are
planning, directing, and selling
planning, directing, and controlling
planning, manufacturing, and controlling
directing, manufacturing, and controlling
A firm has obtained information that would have caused it to decline an engagement had the information been available earlier. Actions available to the auditor would include the following, except:
Withdraw from the engagement
Issue a disclaimer of opinion
Reporting the information and its implications to the person/s who appointed the CPA
Withdraw from the client relationship
Which of the following factors have not influenced financial reporting?
National legislation
Economic factors
Accounting standards
GAAP
Which of the following is NOT commonly regarded as being a credit policy variable?
Payments deferral period
Collection policy
Credit standards
Cash discounts
In ABC inventory classification model, items class A is:
large dollar value items but comprise a relatively small percentage of the total number of items held in inventory
low dollar value items but comprise a large percentage of the total items held in inventory
low dollar value items but comprise a relatively small percentage of the total number of items held in inventory
large dollar value items but comprise a large percentage of the total items held in inventory
Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:
an increase in sales
higher profits
an increase in the average collection period
a decrease in bad debt losses
The credit policy of Spurling Products is "1 5/10, net 35 " At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice What would receivables be if all customers took the cash discount?
Unable to determine without more information
Lower than the present level
Higher than the present level
No change from the present level
An increase in the firm's receivable turnover ratio means that:
cash sales have decrease
it has initiated more liberal credit terms
it is collecting credit sales more quickly than before
inventories have increase
Spontaneous financing includes
accounts receivable
accounts payable
short-term loans
a line of credit
Costs of not carrying enough inventory include:
lost sales; customer disappointment; possible worker layoffs
lost sales
customer disappointment
possible worker layoffs
Which of the following statements is most consistent with efficient inventory management? The firm has a
low incidence of production schedule disruptions
below average inventory turnover ratio
below average total assets turnover ratio
relatively high current ratio
Which of the following statements is NOT CORRECT?
An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower
Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex
The maturity of most bank loans is short term Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan
Loans from commercial banks generally appear on balance sheets as notes payable A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms
Which of the following illustrates the use of a hedging (or matching) approach to financing?
Short-term assets financed with long-term liabilities
Short-term assets financed with equity
All assets financed with 50 percent equity, 50 percent long-term debt mixture
Permanent working capital financed with long- term liabilities
Which of the following statements is CORRECT?
Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk
Conservative firms generally use no short-term debt and thus have zero current liabilities
A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt
If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet
Which of the following statements is CORRECT?
Trade credit is provided only to relatively large, strong firms
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate
Commercial paper is typically offered at a long-term maturity of at least five years
Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies
Which of the following is NOT a cash outflow for the firm?
depreciation
dividends
interest payments
taxes
Which of the following statements is NOT CORRECT?
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate
Accruals are "free" in the sense that no explicit interest is paid on these funds
A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital
Bank loans generally carry a higher interest rate than commercial paper
Which of the following statements is NOT CORRECT?
A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year
The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans
If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60
Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected
__ is defined as the length of time required to recover the initial cash out-lay
Payback-period
Inventory conversion period
Discounted payback-period
Budget period
Which of the following statements is NOT CORRECT?
If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit
The maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs
A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength
A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan
Which of the following statements is NOT CORRECT?
The facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs
Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities
Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts
Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able to rollover (renew) its debt This is especially true if the funds are used to finance long-term assets rather than short-term assets
All of the following influence capital budgeting cash flows EXCEPT:
accelerated depreciation
salvage value
tax rate changes
method of project financing use
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
Long-term debt
Common stock
Preferred stock
Accounts payable
A single, overall cost of capital is often used to evaluate projects because:
it avoids the problem of computing the required rate of return for each investment proposal
it is the only way to measure a firm's required return
it acknowledges that most new investment projects have about the same degree of risk
it acknowledges that most new investment projects offer about the same expected return
Which of the following statements is correct?
If the NPV of a project is greater than 0, its PI will equal 0
If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0
If the PI of a project is less than 1, its NPV should be less than 0
If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0
The estimated benefits from a project are expressed as cash flows instead of income flows because:
this is required by the Internal Revenue Service
this is required by the Securities and Exchange Commission
it is cash, not accounting income, that is central to the firm's capital budgeting decision
it is simpler to calculate cash flows than income flows
In the _ , the future value of all cash inflow at the end of time horizon at a particular rate of interest is calculate
Discounting technique
Compounding technique
Risk Premium
Risk-free rate
When _ _ is greater than zero the project should be accepte
Internal rate of return
Modified internal rate of return
Net present value
Profitability index
A project's profitability index is equal to the ratio of the _ _ of a project's future cash flows to the project's _ _
present value; initial cash outlay
net present value; initial cash outlay
present value; depreciable basis
net present value; depreciable basis
To increase a given present value, the discount rate should be adjusted
upwar
downwar
no change
constant
The firm should accept independent projects if:
the profitability index is greater than 1 0
the payback is less than the IRR
the IRR is positive
the NPV is greater than the IRR
If the IRR is greater than the required rate of return, the:
present value of all the cash inflows will be greater than the initial outlay
project should be rejecte
payback will be greater than the life of the investment
payback will be less than the life of the investment
In order to maximize firm value, management should invest in new assets when the internal rate of return is:
greater than the cost of debt financing
less than the firm’s marginal cost of capital
less than the accounting rate of return
greater or equal to the firm’s marginal cost of capital
Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero
Investment a pays $250 at the beginning of every year for the next 10 years (a total of 10 payments)
Investment a pays $125 at the end of every 6- month period for the next 10 years (a total of 20 payments)
Investment a pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments)
Investment a pays $250 at the end of every year for the next 10 years (a total of 10 payments)
A profitability index of 0 85 for a project means that:
the project's NPV is greater than zero
the present value of benefits is 85% greater than the project's costs
the payback period is less than one year
the project returns 85 cents in present value for each current dollar investe
Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero
Investment a pays $250 at the end of every year for the next 10 years (a total of 10 payments)
Investment a pays $125 at the end of every 6- month period for the next 10 years (a total of 20 payments)
Investment a pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments)
Investment a pays $250 at the beginning of every year for the next 10 years (a total of 10 payments)
The term "capital structure" refers to:
shareholder's equity
total assets minus liabilities
long-term debt, preferred stock, and common stock equity
current assets and current liabilities
A capital investment is one that
has the prospect of long-term benefits
has the prospect of short-term benefits
is only undertaken by large corporations
applies only to investment in fixed assets
Which of the following is not an example of variable costs?
Direct Labor
Packaging
Depreciation
Freight costs
The debt ratio is a measure of a firm’s:
leverage
profitability
liquidity
efficiency
The cost of equity capital is all of the following EXCEPT:
generally lower than the before-tax cost of debt
the minimum rate that a firm should earn on the equity-financed part of an investment
a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchange
by far the most difficult component cost to estimate
The common stock of a company must provide a higher expected return than the debt of the same company because
there is less demand for stock than for bonds
there is greater demand for stock than for bonds
there is a market premium required for bonds
there is more systematic risk involved for the common stock
In calculating the proportional amount of equity financing employed by a firm, we should use:
the current market price per share of common stock times the number of shares outstanding
the common stock equity account on the firm's balance sheet
the sum of common stock and preferred stock on the balance sheet
the book value of the firm
Market values are often used in computing the weighted average cost of capital because
this is consistent with the goal of maximizing shareholder value
this is the simplest way to do the calculation
this is required in the U S by the Securities and Exchange Commission
this is a very common mistake
Which of the following statements is CORRECT?
Capital market instruments include both long-term debt and common stocks
An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift
The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically
If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction
In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?
preferred stock
debt
common stock
retained earnings
Rank in ascending order (i e , 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company's long-term financing
1 = bonds; 2 = preferred stock; 3 = common stock
1 = bonds; 2 = common stock; 3 = preferred stock
1 = common stock; 2 = preferred stock; 3 = bonds
1 = preferred stock; 2 = common stock; 3 = bonds
Which of the following is not considered a permanent source of financing?
Corporate bonds
Common stock
Preferred stock
Commercial paper
Which of the following statements (in general) is correct?
The lower the total debt-to-equity ratio, the lower the financial risk for a firm
A low receivables turnover is desirable
An increase in net profit margin with no change in sales or assets means a poor ROI
The higher the tax rate for a firm, the lower the interest coverage ratio
A company can improve (lower) its debt-to-total assets ratio by doing which of the following?
Sell common stock
Borrow more
Shift short-term to long-term debt
Shift long-term to short-term debt
Financing a long-lived asset with short-term financing would be
an example of "high risk -- high (potential) profitability" asset financing
an example of "moderate risk -- moderate (potential) profitability" asset financing
an example of "low risk -- low (potential) profitability" asset financing
an example of the "hedging approach" to financing
If a company issues bonus shares the debt equity ratio will
Remain unaffected
Will be affected
Unable to determine without more information
Will improve
The firm’s target capital structure should be consistent with which of the following statements?
Maximize the earnings per share (EPS)
Minimize the cost of debt
Obtain the highest possible bond rating
Minimize the cost of equity
____________ and____________ carry a fixed rate of interest and are to be paid off irrespective of the firm’s revenues
Dividends, Bonds
Debentures, Dividends
Debentures, Bonds
Dividends, Treasury notes
If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a ____________
vertical merger
international mergers
horizontal merger
leveraged buyouts
Which of the following is a primary market transaction?
You buy 200 shares of IBM stock from your brother The trade is not made through a broker - you just give him cash and he gives you the stock
One financial institution buys 200,000 shares of IBM stock from another institution An investment banker arranges the transaction
IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker
You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE
Which of the following statements is CORRECT?
As they are generally defined, money market transactions involve debt securities with maturities of less than one year
The IPO market is a subset of the secondary market
If you purchased 100 shares of Disney stock from your brother-in-law, this would be an example of a primary market transaction
If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction
You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE This is an example of:
A futures market transaction
A primary market transaction
A money market transaction
A secondary market transaction
Palo Alto Industries has a debt-to-equity ratio of 1 6 compared with the industry average of 1 4 This means that the company
will not experience any difficulty with its creditors
has less liquidity than other firms in the industry
will be viewed as having high creditworthiness
has greater than average financial risk when compared to other firms in its industry
____________________ occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money
Leveraged buyouts (LBOs)
Joint ventures
Conglomerate merger
Defensive tactics
Which of the following statements is CORRECT?
In a merger with true synergies, the postmerger value exceeds the sum of the separate companies' pre-merger values
Most defensive mergers occur as a result of managers' actions to maximize shareholders’ wealth
Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price
The two principal advantages of holding companies are (1) the holding company can control a great deal of assets with limited equity and (2) the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock
A _________________ is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope
Conglomerate merger
Defensive tactics
Joint venture
Leveraged buyouts (LBOs)
Which of the following statements is NOT CORRECT?
The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share
Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency
A joint venture is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope
Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money
