Principles of Finance, 6e
Besley/Brigham
Principles of Finance, 6e
Besley/Brigham
Chapter 02
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63. A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to
provide financing to a company of questionable financial strength.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Junk Bonds
64. Because junk bonds are such high-risk instruments, the returns on such bonds aren’t very high and the existence of this
market detracts from social welfare.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Junk Bonds
65. There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest
for AAA rated bonds, and required returns increase as the ratings get lower (worse).
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Bond Ratings
66. In the event of bankruptcy, debtholders have a prior or first claim to a firm’s income and assets over the claims of both
common and preferred stockholders. However, in bankruptcy all debtholders are treated equally as a single class of
claimants.
Principles of Finance, 6e
Besley/Brigham
Chapter 02
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Bankruptcy
67. Par value is not necessarily the actual price at which common stock is issued by the firm, but it does constitute the
maximum legal liability per share in the event of bankruptcy.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Par Value
68. The additional paid-in capital account represents the difference between a stock’s par value and the funds actually
received from the sale of new common stock.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Additional Paid-In Capital
69. A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of
common stock. A proxy can be an important tool relating to control of the firm.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Principles of Finance, 6e
Besley/Brigham
Chapter 02
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Page 33
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Eurodollar Market
87. The interest rate paid on Eurodollar deposits depends on the particular bank’s lending rate and on rates of return
available on U.S. money market instruments.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Eurodollar Interest Rates
88. Although common stock represents a riskier investment to an individual than do bonds, in the sense of exposing the
firm to the risk of bankruptcy, bonds represent a riskier method of financing to a corporation than does common stock.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Types of Financing
89. An indexed bond has its value tied to an inflation index. As inflation increases the value of the bond increases and the
issuer is responsible for the accumulated value which may become much greater than the original face value.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Principles of Finance, 6e
Besley/Brigham
Chapter 02
Cengage Learning Testing, Powered by Cognero
Page 35
93. A zero coupon bond’s value increases over time at a compounded (or exponential) rate, not at a constant (or linear)
rate. The corporate issuer reports the annual increase as interest expense, and the owner of the bond reports the increase as
interest income and pays taxes on it each year.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Zero Coupon Bond
94. One of the disadvantages to a firm in issuing zero coupon bonds is that the tax shield associated with the bonds’
appreciation cannot be claimed until the bond matures.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Zero Coupon Bond
95. “Treasury zeros” are Treasury bonds that have been split or “stripped” into a zero coupon discount Treasury certificate
and a series of interest payments (the coupon payments). These bonds are safer than corporate zeros and thus, are very
popular with institutional investors such as pension fund managers.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Treasury Zeros
96. From a social welfare perspective, common stock is a desirable form of financing in part because it involves no fixed
charge payments. Its inclusion in a firm’s capital structure makes the firm less vulnerable to the consequences of
Principles of Finance, 6e
Besley/Brigham
Chapter 02
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Page 36
unanticipated declines in sales and earnings than if only debt were available.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Common Stock and Social Welfare
97. A proxy fight involves a battle by a shareholder or group of shareholders who seek to change the investment policy of
the firm. If the proxy group is successful, current management retains control of the firm but the proxy group dictates
what investments the firm makes.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Proxy Fight
98. Preferred stockholders have priority over common stockholders with respect to earnings. Dividends must be paid on
preferred stock before they can be paid on common stock. In exchange for this priority to dividends, preferred
stockholders give up their priority claims to common stockholders in the event of bankruptcy.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Preferred Stock
99. As with common stock, preferred stock always has a par value, and also, like common stock, the par value is
unimportant in the event of liquidation. However, the preferred stock dividend does depend on the par value and the
dividend is usually stated as a percentage of par.
Principles of Finance, 6e
Besley/Brigham
Chapter 02
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Preferred Stock
100. Preferred stock can provide a financing alternative for some firms when market conditions are such that those firms
can issue neither pure debt nor common stock at reasonable cost.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Preferred Stock
101. A real asset is intangible, because it represents a promise that future cash flows will be paid to the owner.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Financial Asset
102. A financial asset is tangible; it is a physically observable and touchable item.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
Principles of Finance, 6e
Besley/Brigham
Chapter 02
Cengage Learning Testing, Powered by Cognero
Page 39
106. Retained earnings are a balance sheet account that indicates the total amount of earnings the firm has not paid out as
dividends throughout its history.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Retained Earnings
107. The balance sheet item common equity represents the sum of the firm’s common stock, paid-in capital, and retained
earnings, which equal the common stockholders’ total investment in the firm stated at book value.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Common Stock
108. A firm that issues “no-par” stock will not have a separate common stock and additional paid-in capital account on
their balance sheet, it will be consolidated into a single account called common stock.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Common Stock
109. Discounted securities are debt instruments that pay periodic interest payments and sell at par value when issued. The
interest payments generate a positive return for the purchaser of discounted securities.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
Chapter 02
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Page 40
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Discounted Securities
110. The par value of a share of common stock represents the minimum price at which new shares can be sold. All new
issues of common stock must have a par value equal to the current market price of the share.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Par Value
111. T-bills are issued electronically with face values ranging from $1,000 to $5 million and with maturities of 4, 13, 26,
or 52 weeks at the time of issue.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-01 – Stocks and Bonds
Time Estimate-a – 5 min.
TOPICS:
Types of Debt