FIN 350 Week 6 Quiz 5 Chapter 9 and 10 – Strayer

FIN 350 Week 6 Quiz – Strayer (All Possible Questions With Answers)

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Chapter 9—Mortgage Markets

1. Mortgage-backed securities are commonly contained within collateralized debt obligations.
a. True
b. False

2. Federally insured mortgages guarantee
a. loan repayment to the lending financial institution.
b. that the interest rate will not increase during the life of the mortgage.
c. the lending financial institution a selling price for the mortgage in the secondary market.
d. all of the above

3. At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.
a. below
b. above
c. equal to
d. all of the above are very common

4. An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.
a. stable; decreasing
b. increasing; stable
c. increasing; decreasing
d. decreasing; increasing

5. Rates for adjustable-rate mortgages are commonly tied to the
a. average prime rate over the previous year.
b. Fed’s discount rate over the previous year.
c. average Treasury bill rate over the previous year.
d. average Treasury bond rate over the previous year.

6. Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically
a. 2 percent per year and 5 percent for the mortgage lifetime.
b. 5 percent per year and 15 percent for the mortgage lifetime.
c. 0 percent per year and 10 percent for the mortgage lifetime.
d. 3 percent per year and 8 percent for the mortgage lifetime.

7. From the perspective of the lending financial institution, interest rate risk is
a. lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
b. lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
c. higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
d. higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.

8. Mortgage companies specialize in
a. purchasing mortgages originated by other financial institutions.
b. investing and maintaining mortgages that they create.
c. originating mortgages and selling those mortgages.
d. borrowing money through the creation of mortgages that is used to invest in real estate.

9. For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.
a. greater; greater
b. greater; lower
c. lower; greater
d. lower; lower

10. A financial institution has a higher degree of interest rate risk on a ____ than a ____.
a. 30-year fixed-rate mortgage; 15-year fixed-rate mortgage
b. 30-year variable-rate mortgage; 30-year fixed-rate mortgage
c. 15-year fixed-rate mortgage; 30-year fixed-rate mortgage
d. 15-year variable-rate mortgage; 15-year fixed-rate mortgage

11. A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.
a. True
b. False

12. Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.
a. 1,014; 264
b. 1,241; 750
c. 1,014; 750
d. none of the above

13. A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)
a. chattel mortgage.
b. balloon payment mortgage.
c. variable-rate mortgage.
d. open-ended mortgage bond.

14. In an amortization schedule of monthly mortgage payments
a. the amount of interest in each payment is equal to the principal paid.
b. interest payments exceed principal payments early on.
c. principal payments exceed interest payments early on.
d. B and C both occur with about equal frequency

15. A mortgage with low initial payments that increase over time without ever leveling off is a
a. graduated payment mortgage.
b. growing-equity mortgage.
c. second mortgage.
d. shared-appreciation mortgage.

16. The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.
a. higher than; behind
b. equal to that; equal to
c. lower than; ahead of
d. higher than; ahead of
e. lower than; behind

17. Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?
a. second mortgage
b. growing-equity mortgage
c. graduated payment mortgage
d. shared-appreciation mortgage

18. A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.
a. graduated payment mortgage
b. growing-equity mortgage
c. second mortgage
d. shared-appreciation mortgage

19. Mortgage companies, commercial banks and savings institutions are the primary originators of mortgages.
a. True
b. False

20. ____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria.
a. Freddie Mac
b. Ginnie Mae
c. Fannie Mae
d. None of the above

21. “Securitization” refers to the private insurance of conventional mortgages.
a. True
b. False

22. A financial institution may service a mortgage even after selling it.
a. True
b. False

23. The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to
a. interest rate risk.
b. reinvestment rate risk.
c. credit risk.
d. insurance risk.

24. Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant.
a. increase; increase
b. decrease; decrease
c. increase; decrease
d. none of the above

25. Collateralized mortgage obligations (CMOs) are generally perceived to have
a. no prepayment risk but some default risk.
b. no prepayment risk and no default risk.
c. the same interest rate risk as money market securities.
d. a high degree of prepayment risk.

26. Mortgage prices are subject to
a. interest rate risk.
b. credit risk.
c. prepayment risk.
d. all of the above.

27. During a weak economy, the credit risk to a financial institution from investing in mortgage-backed securities representing subprime mortgages is ____ than that of mortgage-backed securities representing prime mortgages.
a. equal to
b. slightly less than
c. more than
d. substantially less than

28. ____ are backed by conventional mortgages.
a. Ginnie Mae mortgage-backed securities
b. Federal Reserve mortgage-backed securities
c. Private-label pass-through securities
d. Shared appreciation pass-through securities

29. Which of the following is not a guarantor of federally insured mortgages?
a. the Federal Housing Administration (FHA)
b. the Veteran’s Administration (VA)
c. the Federal Deposit Insurance Corporation (FDIC)
d. all of the above are guarantors of federally insured mortgages

30. ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
a. Strong; increase; decrease
b. Strong; increase; increase
c. Weak; decrease; increase
d. Weak; increase; increase
e. Weak; decrease; decrease

31. A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.
a. balloon-payment
b. graduated-payment
c. shared-appreciation
d. growing-equity
e. none of the above

32. The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____.
a. originator’s; borrower
b. borrower’s; originator
c. government’s; originator
d. none of the above

33. When financial institutions originate residential mortgages, the mortgage contract should not specify
a. whether the mortgage is federally insured.
b. the amount of the loan.
c. whether the interest rate is fixed or adjustable.
d. the maturity.
e. the mortgage contract should specify all of the above

34. Which of the following is not a common type of mortgage-backed security according to your text?
a. participation certificates (PCs)
b. collateralized mortgage obligations (CMOs)
c. balloon-payment mortgage certificates
d. private-label pass-through securities
e. all of the above are common types of mortgage pass-through securities

35. ____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.
a. Interest rate
b. Credit
c. Prepayment
d. Reinvestment rate

36. Mortgage-backed securities are assigned ratings by:
a. rating agencies.
b. the Treasury.
c. the Fed.
d. the mortgage originator.

37. In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).
a. balloon payments
b. caps
c. tranches
d. strips

38. The credit crisis is mostly attributed to the use of:
a. strict criteria applied by mortgage originators.
b. liberal criteria applied by mortgage originators.
c. very tough credit ratings applied to mortgages.
d. fixed-rate mortgages with long terms to maturity.

39. Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:
a. were unwilling to finance new mortgages.
b. invested heavily in balloon mortgages.
c. invested only in prime mortgages that offered very low returns.
d. invested heavily in subprime mortgages.

40. ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.
a. Prime
b. Balloon
c. Amortized
d. Subprime

41. The secondary mortgage market that accommodates originators of mortgages who desire to sell their mortgages before maturity.
a. True
b. False

42. Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.
a. True
b. False

43. Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.
a. True
b. False

44. Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages.
a. True
b. False

45. A balloon-payment mortgage requires interest payments for a three- to five-year period. At the end of this period, full payment of the principal (the balloon payment) is required.
a. True
b. False

46. During the early years of a mortgage, most of the monthly payment reflects principal.
a. True
b. False

47. Mortgages are rarely sold in the secondary market.
a. True
b. False

48. An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes mortgage prices to decrease.
a. True
b. False

49. Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.
a. True
b. False

50. The higher the level of equity invested by the borrower, the higher the probability that the loan will default.
a. True
b. False

51. Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.
a. True
b. False

52. Non-U.S. financial institutions never hold mortgages on U.S. property.
a. True
b. False

53. The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.
a. primary
b. secondary
c. money
d. none of the above

54. Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.
a. exchange rate
b. prepayment
c. reinvestment rate
d. interest rate
e. exchange rate

55. From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages.
a. higher; shorter
b. higher; longer
c. lower; shorter
d. lower; higher
e. Answers B and C are correct.

56. During the early years of a mortgage,
a. most of the monthly payment reflects principal reduction.
b. most of the monthly payment reflects interest.
c. about half of the monthly payment reflects interest.
d. Cannot answer without more information.

57. Which of the following will typically require homeowners to ultimately request a new mortgage?
a. graduated-payment mortgage (GPM)
b. growing-equity mortgage
c. balloon-payment mortgage
d. shared-appreciation mortgage

58. Which of the following is not true with respect to a growing-equity mortgage?
a. It is similar to a graduated-payment mortgage.
b. It allows borrowers to initially make small payments on the mortgage.
c. It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage.
d. It involves payments that level off after the first five to ten years of the mortgage.

59. ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
a. Strong; decrease; decrease
b. Strong; increase; increase
c. Weak; increase; increase
d. Weak; decrease; increase
e. Weak; decrease; decrease

60. The probability that a borrower will default (credit risk) is influenced by all of the following, except
a. economic conditions.
b. the level of equity invested by the borrower.
c. the borrower’s income level.
d. the borrower’s credit history.
e. Credit risk is affected by all of the above.

61. In a short sale of a home:
a. the lender forecloses and then sells the home for less than what is owed on the mortgage.
b. the lender allows the homeowner to sell the home for less than what is owed on the mortgage.
c. the lender does not recover the full amount of the mortgage.
d. B and C
e. A and C

62. An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages.
a. True
b. False

63. The valuation of mortgage-backed securities is difficult because of limited
transparency.
a. True
b. False

64. A(n) _________ problem occurs when a person or institution does not have to bear the full consequence of its behavior and therefore assumes more risk than it otherwise would.
a. asymmetric information
b. M

oral hazard
c. risk adjustment
d. specific hazard

65. A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities.
a. default insurance contract
b. default risk swap
c. credit default swap
d. collateralized debt obligation

66. Speculators sell credit default swaps to benefit from the default of specific subprime mortgages.
a. True
b. False

Chapter 10—Stock Offerings and Investor Monitoring

1. Which of the following statements is incorrect?
a. A stock is a certificate representing partial ownership in a corporation.
b. Like debt securities, common stock is issued by firms to obtain funds.
c. Stocks are issued by corporations to raise short-term funds.
d. The secondary stock market enables investors to sell stocks that they had previously purchased.

2. Preferred shareholders
a. typically have the same voting rights as common shareholders.
b. do not share the ownership of the firm with common shareholders.
c. typically participate in the profits of the firm beyond the stated fixed annual dividend.
d. may not receive a dividend every year.

3. From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
a. True
b. False

4. A ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock.
a. residual claim
b. preferred margin
c. cumulative provision
d. liquidation claim

5. Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy.
a. more; can
b. less; can
c. more; cannot
d. less; cannot

6. When a corporation first decides to issue stock to the public, it engages in a(n)
a. secondary offering.
b. initial public offering.
c. seasoned equity offering.
d. none of the above

7. A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by
a. use of proxy.
b. shelf-registration.
c. use of a margin call.
d. use of preemptive rights.

8. The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible ____ prices is referred to as ____.
a. IPO; margin selling
b. offer; secondary market building
c. offer; bookbuilding
d. IPO; bookbuilding

9. To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves.
a. True
b. False

10. The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised.
a. 1
b. 3
c. 7
d. 25

11. If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock’s price.
a. upward pressure
b. downward pressure
c. no additional pressure
d. none of the above

12. The purpose of a lockup provision is to
a. keep individual investors from buying and selling stock.
b. prevent downward pressure on the stock’s price.
c. increase the number of outstanding shares.
d. allocate a larger proportion of stock to institutional investors.

13. When the lockup period expires, the share price commonly
a. remains unchanged.
b. increases significantly.
c. decreases significantly.
d. none of the above

14. IPOs tend to occur more primarily during recessions.
a. True
b. False

15. The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years.
a. 10
b. 20
c. 30
d. 50

16. The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
a. flipping.
b. skiing.
c. flopping.
d. none of the above

17. ____ occurs when a securities firm allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank.
a. Flipping
b. Spinning
c. Laddering
d. None of the above

18. When brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as
a. flipping.
b. spinning.
c. laddering.
d. none of the above

19. On average, IPOs of firms tend to perform ____ over a period of a year or longer.
a. well
b. poorly
c. about the same as the S&P 500 index
d. none of the above

20. A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC.
a. True
b. False

21. A firm will typically attempt to sell shares from a secondary offering
a. far below the prevailing market price.
b. far above the prevailing market price.
c. at the prevailing market price.
d. at the offer price of the IPO.

22. Buy and sell orders on the OTC market are completed by
a. auction on the trading floor.
b. sealed competitive bids.
c. noncompetitive bids.
d. a telecommunications network.

23. A(n) ____ is a certificate which represents ownership of a foreign stock.
a. ADR
b. SEAQ
c. Nasdaq
d. AMEX

24. The first-time issuance of shares by a specific firm to the public is referred to as a(n)
a. stock repurchase.
b. secondary stock offering.
c. initial rights issue.
d. initial public offering (IPO).

25. A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
a. stock repurchase.
b. secondary stock offering.
c. initial rights issue.
d. initial public offering (IPO).

26. Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market.
a. undervalued; undervalued
b. overvalued; overvalued
c. undervalued; overvalued
d. overvalued; undervalued
e. none of the above

27. The largest organized exchange, listing the largest firms, is the
a. New York Stock Exchange.
b. American Stock Exchange.
c. Midwest Stock Exchange.
d. Pacific Stock Exchange.

28. ____ are employed by brokerage firms and execute orders for clients on the floor of the NYSE.
a. Specialists
b. Commission brokers
c. Independent brokers
d. Dealers

29. The OTC market does not have a trading floor.
a. True
b. False

30. Firms listed as “pink sheets” on the OTC market
a. are typically very large.
b. satisfy Nasdaq’s listing requirements.
c. are typically owned by various institutional and individual investors.
d. none of the above

31. The prevailing price per share divided by the firm’s earnings per share is known as the
a. dividend yield.
b. price-earnings ratio.
c. fully diluted earnings per share.
d. annual dividend.

32. The ____ is a value-weighted average of stock prices of 30 large U.S. firms.
a. Dow Jones Industrial Average
b. Standard and Poor’s 500
c. New York Stock Exchange Index
d. Nasdaq

33. The ____ is a value-weighted index of stock prices of 500 large U.S. firms.
a. Dow Jones Industrial Average
b. Standard and Poor’s 500
c. New York Stock Exchange Index
d. Nasdaq

34. Sudden favorable news about the performance of a firm will make investors believe that the firm’s stock is ____ at its prevailing price.
a. overvalued
b. fixed
c. appropriate
d. undervalued

35. Analysts periodically communicate with high-level managers of the firms whose stock they rate.
a. True
b. False

36. Shareholders can most easily measure a firm’s performance by monitoring changes in its ____ over time.
a. share price
b. employee job descriptions
c. board of directors
d. asset size

37. Which of the following is not true regarding the Sarbanes-Oxley Act?
a. It attempts to force accountants to conform to regular accounting standards in preparing a firm’s financial statements.
b. It requires that only outside board members of a firm be on the firm’s audit committee.
c. It allows public accounting firms to offer nonaudit consulting services to an audit client whether the client’s audit committee pre-approves the nonaudit services or not.
d. It prevents members of a firm’s audit committee from receiving consulting of advising fees or other compensation from the firm beyond that earned from serving on the board.

38. An example of shareholder activism is
a. communication with the firm.
b. engaging in a proxy contest.
c. filing a lawsuit against the board.
d. all of the above

39. ____ are acquisitions that require substantial amounts of borrowed funds.
a. Stock repurchases
b. Corporate controls
c. Leveraged buyouts
d. Stock splits

40. ____ are not barriers to corporate control to eliminate agency problems.
a. Leveraged buyouts
b. Antitakeover amendments
c. Poison pills
d. Golden parachutes

41. Listing stock on a foreign stock exchange
a. enhances the stock’s liquidity.
b. may increase the firm’s perceived financial standing.
c. may protect a firm against hostile takeovers.
d. all of the above

42. American Depository Receipts (ADRs) are similar to
a. stock options.
b. bank deposits.
c. stocks.
d. bonds.

43. ____ are portfolios of international stocks created and managed by various financial institutions.
a. International mutual funds
b. American Depository Receipts
c. Exchange rate options
d. Initial Public Offerings

44. ____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers.
a. International mutual funds
b. American Depository Receipts
c. World Equity Depository Receipts
d. Initial Public Depository Receipts

45. When a firm buys some of its shares that it had previously issued, this is referred to as a:
a. reverse IPO.
b. leveraged buyout.
c. ladder spin.
d. stock repurchase.

46. Whenever _____, the stock price will be driven up.
a. supply exceeds demand
b. demand exceeds supply
c. demand is reduced
d. none of the above

47. Which of the following is not a form of shareholder activism?
a. investors communicating their concerns to other investors in an effort to place more pressure on the firm’s managers or its board members
b. poison pills
c. shareholder lawsuits
d. all of the above

48. Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.
a. True
b. False

49. Initial public offerings (IPOs) perform ____ on the day following the IPO and ____ for periods of a year or longer after the IPO.
a. well; poorly
b. poorly; well
c. well; well
d. poorly; poorly

50. Which of the following is not a part of the over-the-counter market?
a. the Nasdaq National Market
b. the Nasdaq Small Cap Market
c. the OTC Bulletin Board
d. the New York Stock Exchange

51. A firm has a current stock price of $15.32. The firm’s annual dividend is $1.14 per share. The firm’s dividend yield is
a. .74 percent.
b. 1.34 percent.
c. 7.44 percent.
d. 1.14 percent.

52. If the secondary market is inactive, then the shares would be illiquid.
a. True
b. False

53. Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund.
a. True
b. False

54. Venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less.
a. True
b. False

55. Venture capital (VC) funds commonly serve as advisors to the businesses in which they invest.
a. True
b. False

56. Venture capital (VC) funds usually invest in publicly-traded businesses.
a. True
b. False

57. Venture capital (VC) funds typically plan to exit from their original investment within a period of about one year.
a. True
b. False

58. The phrase “leaving money on the table” refers to investors who pay more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date.
a. True
b. False

59. Underwriters sell most or all of the shares of an IPO to institutional investors.
a. True
b. False

60. The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.
a. True
b. False

61. Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been smaller.
a. True
b. False

62. In general, secondary offerings cause an immediate increase in the market price of the stock.
a. True
b. False

63. Electronic stock exchanges that execute stock transactions electronically are referred to as electronic communications networks (ECNs).
a. True
b. False

64. As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information.
a. True
b. False

65. As a result of the Sarbanes-Oxley Act, there was a reduced likelihood of fraudulent financial reporting by firms.
a. True
b. False

66. The legal protection of shareholders varies substantially among countries.
a. True
b. False

67. Common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than civil law countries such as France or Italy.
a. True
b. False

68. The government enforcement of securities laws varies among countries.
a. True
b. False

69. The laws of the financial information that must be provided by public companies is similar among all developed countries.
a. True
b. False

70. Electronic communications networks (ECNs) are passive funds that track a specific index.
a. True
b. False

71. A venture capital fund typically plans to exit from its original investment within about four to seven years.
a. True
b. False

72. Venture capital funds typically take over businesses and manage them.
a. True
b. False

73. Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors.
a. True
b. False

74. If investors become dissatisfied with a firm’s performance, they can compete with management in soliciting proxy votes in what is known as a proxy fight.
a. True
b. False

75. Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.
a. True
b. False

76. According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time.
a. True
b. False

77. Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.
a. True
b. False

78. In addition to the Nasdaq market, the OTC market has another segment known as “pink sheets,” where smaller stocks are traded.
a. True
b. False

79. The Dow Jones Industrial Average (DJIA) is a value-weighted average of stock prices of 30 large U.S. firms.
a. True
b. False

80. Research studies have found that the share prices of target firms and of acquiring firms react very positively to announcements of an acquisition.
a. True
b. False

81. If managers believe that their firm’s stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding.
a. True
b. False

82. International exchange-traded funds (ETFs) represent international indexes that reflect composites of stocks for particular countries; shares of the index can be purchased or sold, thereby allowing investors to invest directly in a stock index representing any one of several countries.
a. True
b. False

83. Which of the following is not true with respect to venture capital (VC) funds?
a. When a VC fund decides to invest in a business, it will negotiate the terms of its investment, including the amount of funds it is willing to invest.
b. One common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering.
c. VC funds receive money from wealthy investors and from pension funds that are willing to maintain the investment for a long-term period.
d. All of the above are true with respect to VC funds.

84. Assume a firm that is valued at $800 million with 6 million shares of stock outstanding. This firm’s stock should have a price of $____ per share.
a. 6.00
b. 80.00
c. 133.33
d. none of the above

85. The owners of common stock are permitted to vote on the
a. election of the board of directors.
b. authorization to issue new shares of common stock.
c. approval of amendments to the corporate charter.
d. adoption of bylaws.
e. all of the above

86. Which of the following is not true with respect to preferred stock?
a. Preferred stock usually does not allow for significant voting rights.
b. If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy.
c. Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend.
d. Payment of preferred dividends is not a tax-deductible expense.
e. All of the above are true.

87. Which of the following is false with respect to initial public offerings (IPOs)?
a. IPOs are first-time offerings of shares by a specific firm to the public.
b. Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock to issue and the asking price for the stock.
c. Owners of firms that engage in IPOs are normally required to retain their shares for at least 3 years before selling them in the secondary market.
d. IPOs are typically intended to raise funds so the corporation can expand.

88. To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a ____ period of time.
a. fewer; long
b. more; short
c. more; long
d. Answers A and B are correct.

89. There is strong evidence that IPOs of firms perform ____ on average over a period of a year or longer.
a. well
b. poorly
c. very well relative to other firms in their industry
d. none of the above

90. Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively
a. high.
b. low.
c. either high or low, depending on the overall market.
d. none of the above

91. “Pink sheets” are traded on the
a. New York Stock Exchange.
b. American Stock Exchange.
c. over-the-counter market.
d. Nasdaq market.

92. The annual dividend on Grozky, Inc. stock is $5 per share and the stock’s prevailing price is $93.13 per share. Thus, the stock’s dividend yield is ____ percent.
a. 18.63
b. 5.37
c. 8.81
d. none of the above

93. Which of the following is not a provision specified in the Sarbanes-Oxley Act?
a. It requires that only inside board members of a firm be on the firm’s audit committee.
b. It prevents the members of a firm’s audit committee from receiving consulting or advising fees or other compensation from the firm beyond that earned from serving on the board.
c. It requires that the CEO and CFO of firms that are of at least a specified size certify the audited financial statements are accurate.
d. It allows public accounting firms to offer nonaudit consulting services to an audit client only if the client’s audit committee pre-approves the nonaudit services to be rendered before the audit begins.

94. Which of the following is not a form of shareholder activism?
a. proxy contests
b. antitakeover amendments
c. shareholder lawsuits
d. all of the above are forms of shareholder activism

95. Which of the following is not a barrier to corporate control?
a. antitakeover amendments
b. proxy contests
c. poison pills
d. golden parachutes
e. all of the above are barriers to corporate control

96. Possible disadvantages of private stock exchanges to investors include:
a. only large institutional investors may purchase shares in privately listed stocks
b. required disclosures may be less than those required when a firm goes public.
c. trading volume is limited.
d. B and C

97. After an IPO, firms commonly list their shares on a private stock exchange.
a. True
b. False

98. Managers protected by golden parachutes may be more willing to make decisions that increase the company’s earnings in the long run, even though the decisions adversely affect the stock price in the short run.
a. True
b. False

99. A firm whose stock price has risen:
a. will not have to pay a premium if it acquires another firm.
b. has an incentive to use its stock as currency to acquire the shares of a target firm.
c. is likely to be a candidate for a leveraged buyout.
d. is likely to repurchase some of its shares.

100. Most individual investors attend road shows of firms that are about to go public before they purchase shares at the time of an IPO.
a. True
b. False

101. When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving them:
a. preemptive rights.
b. limit orders.
c. subscription rights.
d. presumptive rights.

102. When a firm goes public and issues stock in the primary market:
a. the equity investment in the firm declines.
b. the firm’s debt level increases.
c. the number of the firm’s owners increases.
d. A and C