Answer Choices:
a. the stock is experiencing supernormal growth.
b. the stock should be sold.
c. the stock is a good buy.
d. management is probably not trying to maximize the price per share.
e. dividends are not likely to be declared.

Answer:
c

Question: Which of the following statements is CORRECT?

Answer Choices:
a. The New York Stock Exchange is an auction market, and it has a physical location.
b. Home mortgage loans are traded in the money market.
c. If an investor sells shares of stock through a broker, then it would be a primary market transaction.
d. Capital markets deal only with common stocks and other equity securities.
e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

Answer:
a. The New York Stock Exchange is an auction market, and it has a physical location.

Question: When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Answer:
Options for Question 9:

Question: For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Answer Choices:
a. True
b. False

Answer:
b. False

Question: According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Answer:
Options for Question 8:

Question: For a stock to be in equilibrium, two conditions are necessary: (1) The stock’s market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor’s required return.

Answer Choices:
a. True
b. False

Answer:
a. True

Question: A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

Answer Choices:
a. True
b. False

Answer:
a. True

Question: Founders’ shares are a type of classified stock where the shares are owned by the firm’s founders, and they generally have more votes per share than the other classes of common stock.

Answer:
Options for Question 5:

Question: If a firm’s stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

Answer:
Options for Question 3:

Question: If a stock’s expected return as seen by the marginal investor exceeds this investor’s required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Answer Choices:
a. True
b. False

Answer:
a. True

Question: Two conditions are used to determine whether or not a stock is in equilibrium: (1) Does the stock’s market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal this investor’s required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

Answer Choices:
a. True
b. False

Answer:
b. False

Question: Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

Answer:
Options:

Question: The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Answer:
Options for Question 6:

Question: Which of the following statements is NOT CORRECT?

Answer Choices:
a. When a corporation’s shares are owned by a few individuals, we say that the firm is “closely, or privately, held.”
b. “Going public” establishes a firm’s true intrinsic value and ensures that a liquid market will always exist for the firm’s shares.
c. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC.
d. When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public, or an IPO,” and the market for such stock is called the new issue or IPO market.
e. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.

Answer:
b. “Going public” establishes a firm’s true intrinsic value and ensures that a liquid market will always exist for the firm’s shares.

Question: Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes.

Answer:
Options:

Question: Which of the following statements is CORRECT?

Answer Choices:
a. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits.
b. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
c. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm’s income as personal income and pay taxes on that income.
d. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation’s income and stockholders were taxed again on this income when it was paid to them as dividends.
e. All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.

Answer:
c. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm’s income as personal income and pay taxes on that income.

Question: Which of the following statements is CORRECT? a. The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned.

Answer Choices:
b. Two metrics that are used to measure a company’s financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.
c. To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue.
d. Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to discourage the use of debt financing by corporations.
e. If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2014, this would lower their free cash flows for 2014.

Answer:
b. Two metrics that are used to measure a company’s financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.

Question: If a stock’s market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor’s estimate of the intrinsic value.

Answer Choices:
a. True
b. False

Answer:
a. True

Question: The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Answer Choices:
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
e. Maximize the stock price on a specific target date.

Answer:
d

Question: In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price in the long run, or the stock’s “intrinsic value.”

Answer Choices:
a. True
b. False

Answer:
a. True

Question: Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes.

Answer:
Options:

Question: The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Answer Choices:
a. Maximize managers’ own interests, which are by definition consistent with maximizing shareholders’ wealth.
b. Maximize the firm’s expected EPS, which must also maximize the firm’s price per share.
c. Minimize the firm’s risks because most stockholders dislike risk. In turn, this will maximize the firm’s stock price.
d. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
e. Since it is impossible to measure a stock’s intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

Answer:
d