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Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 1
© 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
1. The New York Stock Exchange is primarily
a.
A secondary market.
b.
An organized auction market.
c.
An over-the-counter market.
d.
Answers a and b above are both correct.
e.
Answers b and c above are both correct.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
2. Money markets are markets for
a.
Foreign currency exchange.
b.
Consumer automobile loans.
c.
Corporate stocks.
d.
Long-term bonds.
e.
Short-term debt securities.
ANSWER:
e
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Money Markets
3. You have just purchased shares in the Hi-Tech Long-Term Bond Fund, a mutual fund that invests in long-term
corporate bonds. Your purchase constitutes
a.
A direct transfer of funds.
b.
An indirect transfer through an investment banker.
c.
An indirect transfer through a financial intermediary.
d.
A money market transaction.
e.
All of the above.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 2
DISC-FIN-01 - Stocks and Bonds
Time Estimate-a - 5 min.
TOPICS:
Financial Transactions
4. Which of the following statements is correct?
a.
The SEC must approve the price at which a stock is to be offered to the public when a company "goes public."
b.
If a company's stock is listed, then it trades in the over-the-counter (OTC) market.
c.
If the "preemptive right" exists in a company's charter, then the holders of its Class A shares have the right to
receive a specified amount of dividends before dividends can be paid on Class B shares.
d.
A "prospectus" is a document which describes a company and the securities it plans to offer, and the
prospectus generally must be approved by the SEC before a public offering of new securities can be made.
e.
The decision to list a company's stock generally is more important to the company than the decision to go
public, i.e., listing has a larger impact on the way the firm is operated than does going public.
ANSWER:
d
RATIONALE:
If the issue is for more than $1 million, the SEC must approve the prospectus for
completeness, accountants' audit statements, and so forth. The SEC does not have any
say about the price at which the stock is sold.
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Going Public
5. Large, well-known public companies can reduce the time required to register and issue securities by using a(n)
a.
Shelf registration.
b.
Subchapter S registration.
c.
Underwriting syndicate.
d.
Secondary market registration.
e.
"Red herring" registration.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Sale of New Securities
6. Which of the following statements about listing on a stock exchange is most correct?
a.
Listing is a decision of more significance to a firm than going public.
b.
Any firm can be listed on the NYSE as long as it pays the listing fee.
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 3
© 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
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
c.
Listing provides a company with some "free" advertising, and status as a listed company may enhance the
firm's prestige.
d.
Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather
than with the SEC.
e.
Statements b and c are both correct.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Listing
7. Most American investors who are interested in investing in companies listed on foreign exchanges do so by purchasing
____.
a.
Foreign stocks directly from brokers that do business in the country where the company is located.
b.
Foreign stocks from brokers in the United States.
c.
American Depository Receipts (ADRs) or mutual funds that hold international stocks.
d.
Stocks directly from the foreign company.
e.
None of the above.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Investing in Foreign Stocks
8. Which of the following statements is correct?
a.
Flotation costs under a best-efforts arrangement typically are less for a given new equity issue than the costs
associated with an underwritten offering, and the corporation is more certain of getting the needed funds under
a best-efforts offering. This is why best efforts deals are most common.
b.
If a firm decides to issue securities through a direct (or private) placement, then the underwriting syndicate
that is formed to distribute the securities to the public may, at its discretion, decide either to guarantee or not to
guarantee the sale of the securities.
c.
If the demand curve for a firm's stock is relatively flat, the firm will have a more difficult time raising a large
amount of new equity funds for expansion than would be true if this demand curve were steeper.
d.
It is possible for a firm to go public, and yet not raise any additional capital.
e.
None of the above is a correct statement.
ANSWER:
d
POINTS:
1
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 5
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Market Efficiency
11. ____ efficiency states that all publicly available information is reflected in current market prices.
a.
Weak-form
b.
Semistrong-form
c.
Strong-form
d.
Economic
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Market Efficiency
12. ____ efficiency states that all private and publicly available information is reflected in the current market prices.
a.
Weak-form
b.
Semistrong-form
c.
Strong-form
d.
Economic
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Market Efficiency
13. When a firm makes an earnings announcement that is different than what the analysts expected the market price of the
firm's stock adjusts immediately. This is evidence consistent with markets being ____ efficient but not ____ efficient.
a.
weak-form; strong-form
b.
weak-form; semistrong-form
c.
strong-form; semistrong-form
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 6
d.
semistrong-form; strong-form
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Market Efficiency
14. If you purchase stock from a firm conducting a seasoned equity offering, this transaction will take place in ____
markets and ____ markets.
a.
capital; primary
b.
capital; secondary
c.
money; primary
d.
money; secondary
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
15. If you purchase commercial paper that matures in 180 days from the issuing firm this transaction will take place in
____ markets and ____ markets.
a.
capital; primary
b.
capital; secondary
c.
money; primary
d.
money; secondary
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
16. Which of the following assets are traded in the derivative markets?
a.
Stocks, bonds, and options
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 7
b.
Stocks, futures, and options
c.
Options, futures, and swaps
d.
Futures, bonds, and swaps
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Derivatives Markets
17. ____ are individuals employed by brokerage firms that are members of the exchange.
a.
Commission brokers
b.
Floor brokers
c.
Competitive traders
d.
Specialists
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Physical Exchanges
18. Which of the following is not a task that investment bankers perform?
a.
They buy securities from corporations trying to raise funds.
b.
They take deposits from investors and make loans to corporations.
c.
They resell securities purchased from corporations to investors.
d.
They help corporations design securities with the features that are most attractive to investors given existing
market conditions.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Investment Banking
19. Students emerging from college and entering the work force typically consume ____ than their income resulting in
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 8
© 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.
less; saving
b.
more; borrowing
c.
less; borrowing
d.
more; saving
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
20. Financial markets are important because they
a.
allow individuals to transfer purchasing power over time.
b.
provide for the efficient transfer funds to businesses.
c.
facilitate exchanges between the providers and users of capital.
d.
all of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
21. ____ represent(s) ownership in a company and entitle(s) the holder to future cash distributions from the operations of
the firm.
a.
Equity
b.
Debt
c.
Swaps
d.
Options
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Equity
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 9
© 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
22. The trade-through rule states that
a.
new securities are traded through the secondary market.
b.
a stock trade should be executed at the best price that is available in all of the stock markets.
c.
securities traded in the secondary market are traded through the issuing corporation
d.
derivatives should be traded only with the approval of the related firm
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
23. The derivatives market allows for
a.
investors to speculate on price movements.
b.
the purchase corporate debt.
c.
the hedging of exposure to price movements
d.
two of the above
e.
all of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Derivatives Market
24. The conversion of stock exchanges from not-for-profit mutual ownership organizations to for profit organizations is
called what?
a.
Going public
b.
Privatization
c.
Demutualization
d.
Communion
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 11
© 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
trading in unlisted securities.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
OTC Market
29. When stock in a closely held corporation is offered to the public for the first time the transaction is called "going
public" and the market for such stock is called the initial public offering, or IPO, market.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Going Public
30. One reason investment bankers form syndicates is to spread the risk of potential losses.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Investment Banking
31. The percentage of flotation costs associated with a new equity issue is usually quite high for small issues as a
consequence of certain fixed costs which must be incurred regardless of the issue size.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 14
amount to be raised and the type of security to be issued. Once the type of security is chosen this is a decision that cannot
be changed in stage II.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financing Decisions
39. When a firm issues new equity, market pressure applies first to the new shares issued and then to existing shares.
Subsequent to the new issue, the value of the new shares will rise to the equilibrium price of the old shares.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Market Pressure
40. The primary role of financial markets is to help bring together borrowers and savers by facilitating the flow of funds
from individuals and businesses that have surplus funds to individuals, businesses, and governments that have needs for
funds in excess of their income.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
41. Market efficiency refers only to the speed at which financial transactions occur.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
Chapter 03
Cengage Learning Testing, Powered by Cognero
Page 15
© 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-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Market Efficiency
42. Informational efficiency generally exists when the financial markets have a large number of participants in search of
the most profitable investments.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Market Efficiency
43. The primary function of the money markets is to provide liquidity to businesses, governments, and individuals so that
they can meet their short-term needs for cash.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-04 - International Financial Management
Time Estimate-a - 5 min.
TOPICS:
Financial Markets
44. A best efforts arrangement is an agreement for the sale of securities in which the investment bank guarantees the sale
by purchasing the securities from the issuer, thus agreeing to bear any risks involved in the transaction.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
