Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-1
1. Securities markets represent the financial marketplaces for stocks and bonds.
2. Securities markets provide private investors a place to buy and sell stocks, bonds, and
mutual funds.
3. An initial public offering (IPO) represents the first time a corporation’s stock is offered
and sold to persons outside of the company.
4.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-2
The proceeds from a secondary market sale of securities go to the corporation whose
security is being traded.
5. In a secondary market sale of stock, the proceeds go to the investor selling the stock, not
to the corporation.
6. Corporations sell a new issuance of securities in the Primary Market.
7. The primary market allows an investor to purchase financial securities from other
investors.
8.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
The secondary market is where investors (both individuals and companies) go to find
someone who is interested in selling their investments to them.
9. When given a choice, businesses prefer to obtain long-term financing through retained
earnings or by borrowing from a lending institution such as a bank.
10. Issuing stock is considered equity financing.
11. Issuing bonds is considered debt financing.
12. It is easier for a small business to raise funds through a stock issuance than for a large,
well-known company.
19-8
29. Ina Vestor inherited $75,000 when her grandfather died and decided to invest it in the
Hottie Potatee company. As a student of business, you inform her that she can call a
stockbroker who will help her purchase stock on the secondary market.
Feedback: A stockbroker who is licensed to work for a financial company and trade stocks,
bonds, mutual funds, and other investments will purchase stocks on Ina’s behalf on the
secondary market. The broker will find someone who already owns the stock and wants to sell
it.
30. Sam Schiester, a stockbroker at Schemes Financial Services Company called you the
other day asking if you would like to purchase an IPO. “The hot new company, Hottie
Potatee is going public, and I thought you might want to get in on it,” he exclaimed. If
you agree to buy shares of this company, this trade will occur on the secondary market.
Feedback: An IPO (Initial Public Offering) is sold on the primary market. An IPO is a new
issuance of stock or bonds that is being offered by a firm that wants to raise a large sum of
money. It is the first time that this issuance is being offered, so it is sold in the primary
market.
31.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-9
Idle Time Gaming, Inc., has reached a point in its life where it needs several million
dollars in order to expand and become the international company that it says it wants to
be in its strategic plan. After consulting with an investment banker who is willing to
underwrite the issue, it learned that investors will purchase the stock for $22/share. Idle
time will receive a smaller amount for each share that is sold.
Feedback: When an investment banker agrees to underwrite an IPO, it agrees to buy the entire
issue at a discount. It will then sell the shares to interested investors for the full market price.
The difference in the market price per share, and the discount price per share is the amount
that the investment banker keeps as payment for its services.
32. If investor Jones buys a share of stock in the ABC Corporation from investor Smith, the
ABC Corporation automatically receives a fixed percentage of the selling price.
Feedback: The proceeds of the sale of a security go to the investor selling the security, not the
corporation whose security is being traded.
33. Stocks that are not listed as trading on one of the national or international stock
exchanges can be traded on the OTC, Over-The-Counter exchange.
34.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19–10
A stock exchange provides a marketplace where the public can directly buy and sell
securities without the help of intermediaries.
35. Only those individuals and/or companies with a membership on a stock exchange can
buy and sell securities on that stock exchange.
36. Securities and Exchange Commission (SEC) rules prohibit the listing of the stock of
foreign firms on U.S. stock exchanges.
37. The over-the-counter market utilizes an electronic securities trading system.
38.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
The stock of companies that fail to meet a stock exchange’s minimum requirements can
be delisted.
39. The NASDAQ is a floor-based exchange.
40. Stock exchanges compete with each other for the listing of a corporation’s stock.
41. The Federal Trade Commission (FTC) regulates the security markets in the United
States.
42. Before a corporation’s stock can be sold on a major stock exchange, the firm must
provide detailed financial information to the Securities and Exchange Commission.
19–12
43. Insider trading involves the sale of stock to employees at discounted prices.
44. The Securities and Exchange Commission requires that all prospective investors receive
a copy of a firm’s prospectus prior to investing.
45. Insider trading refers to someone who benefits unfairly from information about a
security not available to the general public.
46. Insider trading laws prevent employees from buying or selling the securities of their
employers.
47.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Well-known foreign exchanges that also exchange the securities of U.S. firms include
the London Exchange and the Tokyo Exchange.
48. The number of U.S. companies that are listed on foreign stock exchanges is declining.
49. The prospectus is summarization of the results of detailed financial documents that a
firm files with the SEC prior to being given approval to issue securities.
Feedback: A prospectus is a condensed version of the financial and economic disclosure
documents that a firm files with the Securities and Exchange Commission prior to the new
issuance of stocks or bonds. The prospectus is sent to anyone who is interested or committed
to purchasing the securities.
50. Once a stock exchange agrees to list a company, the firm can be assured that it will
always be listed by that exchange.
Feedback: A company’s stock can be delisted from an exchange if, at any time, it fails to meet
the requirements of listing.
19–15
54. In an effort to profit from stock market trading, Chad landed a job with the ABC
Corporation. Chad intends to use his position to obtain privileged information about his
new employer that would not be available to the public. While Chad realizes that he may
be benefiting unfairly, as an employee he is not acting illegally.
Feedback: Insider trading is the name applied to this strategy. It is illegal to benefit unfairly
from fluctuations in security prices based upon information not available to the general
public.
55. An executive secretary at a major investment banking firm is asked to copy documents
that detail a major merger that’s going to be finalized in the next two weeks. This merger
will be a positive outcome for one of the companies in this deal. The secretary is thrilled
to read about the merger, plans to call her broker immediately and buy stock in the
company, and suggests that you should also act on her stock tip. Since you are not
employed at her firm your purchase is legal.
Feedback: Insider trading involves buying or selling a stock on the basis of company
information not available to the investing public. In this case the secretary would be
participating in insider trading and you would be as well.
56. Stocks represent shares of ownership in a company.
57.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Stock certificates identify per share dividends, expressed as a percentage of par value.
58. Par value reflects the current market price for a stock.
59. Dividends represent a portion of a firm’s profits that are distributed to bondholders first
then stockholders.
60. Although companies that issue bonds are required to pay interest, companies issuing
stock are not required to pay dividends.
61. When a corporation enjoys a profitable year, dividends must be paid.
19–17
62. Issuing new common stock usually expands ownership, giving all owners the right to
vote for the firm’s board of directors.
63. Issuing new stock increases the firm’s outstanding debt on their balance sheet.
64. If paid, dividends come from any profits remaining after the firm has paid taxes. The
company cannot deduct dividends as an expense of doing business.
65. Corporate management decisions are influenced by the desire to keep stockholders
happy.
66.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19–18
Preferred stockholders have voting rights privileges not shared by common
stockholders.
67. Preferred stockholders receive dividend payments before common stockholders are paid
any dividends.
68. If the firm should find itself in bankruptcy, preferred stockholders would have claim to
the value of any remaining assets before common stockholders.
69. Preferred stock may include callable and convertible provisions.
70.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19–19
Preemptive rights provide common stockholders the first right to purchase any new
shares of common stock issued by the firm.
71. Cumulative preferred stockholders enjoy the first right to purchase any new shares of
stock issued by the firm.
72. Cumulative preferred stockholders enjoy a promise that missed dividends will
accumulate and be paid later, before any dividends are paid to common stockholders.
73. Both preferred stocks and bonds represent funding sources that require repayment to
investors.
74.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Corporations that issue preferred stock incur a legal obligation to pay dividends to those
stockholders.
75. For the firm, the cost of paying dividends to common stockholders is higher than the
cost of the same amount of interest paid to bondholders.
Feedback: Dividends are paid out of after-tax profits. Interest payments are a tax- deductible
expense and therefore paid before taxes are calculated.
76. The similarities between common stocks and bonds include a face or par value and a
fixed rate of return for investors.
Feedback: Preferred stock and bonds are similar in that both may have a face or par value,
and both have a fixed rate of return.
77.