a. True
b. False
Answer: False
Question: A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?
Answer Options:
a. Congress passes a law that severely restricts hostile takeovers.
b. A firm’s compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.
c. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
d. The company’s outside auditing firm is given a lucrative year-by-year consulting contract with the company.
e. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.
Answer: e
Question: A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.
Answer Options:
a. True
b. False
Answer: a. True
Question: The term IPO stands for “individual purchase order,” as when an individual (as opposed to an institution) places an order to buy a stock.
Answer Options:
a. True
b. False
Answer: False
Question: If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm’s net income.
a. True
b. False
Answer: True
Question: If a lower level person in a firm does something illegal, like “cooking the books,” to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
True
False
Answer: b. False
Question: You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?
a. This is an example of a direct transfer of capital.
b. This is an example of a primary market transaction.
c. This is an example of an exchange of physical assets.
d. This is an example of a money market transaction.
e. This is an example of a derivative market transaction.
Answer: a
Question: From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same for own versus lease decisions.
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. The term “IPO” stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.
b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.
c. In a “Dutch auction,” investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.
d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed.
e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.
Answer: c
Question: Which of the following statements is CORRECT?
Answer Options:
a. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.
b. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.
c. One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.
d. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor.
e. Potential conflicts between stockholders and bondholders are increased if a firm’s bonds are convertible into its common stock.
Answer: b
Question: The NYSE is defined as a “primary” market because it is one of the largest and most important stock markets in the world.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
Answer Options:
a. The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.
b. Capital market transactions involve only preferred stock or common stock.
c. If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding.
d. Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks.
e. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
Answer: d
Question: The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.
Answer Options:
a. True
b. False
Answer: False
Question: The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
a. True
b. False
Answer: True