Chapter 10: Stock Offerings and Investor Monitoring
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1. Which of the following statements is incorrect?
a.
A stock represents partial ownership in a corporation.
b.
Like debt securities, common stock is issued by firms to obtain funds.
c.
Stocks are issued by corporations to raise short-term funds.
d.
The secondary stock market enables investors to sell stocks that they had previously purchased.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
2. Preferred shareholders
a.
typically have the same voting rights as common shareholders.
b.
do not share the ownership of the firm with common shareholders.
c.
typically participate in the profits of the firm beyond the stated fixed annual dividend.
d.
may not receive a dividend every year.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
3. From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
4. A ____ prevents dividends from being paid on common stock until all current and previously omitted dividends are
paid on preferred stock.
a.
residual claim
b.
preferred margin
c.
cumulative provision
d.
liquidation claim
ANSWER:
c
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Page 2
5. Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on
preferred stock ____ be omitted without the firm being forced into bankruptcy.
a.
more; can
b.
less; can
c.
more; cannot
d.
less; cannot
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
6. When a corporation first decides to issue stock to the public, it engages in a(n)
a.
secondary offering.
b.
initial public offering.
c.
seasoned equity offering.
d.
none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
7. A firm can avoid the time lag between registering new securities with the SEC and actually selling them by using
a.
a proxy.
b.
shelf registration.
c.
a margin call.
d.
preemptive rights.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.04
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 10: Stock Offerings and Investor Monitoring
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Page 3
8. To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing
firm receives from the IPO are less than it deserves.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
9. The transaction costs to the issuing firm in an IPO are usually ____ percent of the funds raised.
a.
1
b.
3
c.
7
d.
25
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
10. If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock’s price.
a.
upward pressure
b.
downward pressure
c.
no additional pressure
d.
none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
11. The purpose of a lockup provision is to
a.
keep individual investors from buying and selling stock.
b.
prevent downward pressure on the stock’s price.
c.
increase the number of outstanding shares.
d.
allocate a larger proportion of stock to institutional investors.
ANSWER:
b
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Page 4
12. IPOs tend to occur more frequently during recessions.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
13. The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years.
a.
10
b.
20
c.
30
d.
50
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
14. The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
a.
flipping.
b.
skiing.
c.
flopping.
d.
none of the above
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
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Page 6
19. A(n) ____ represents ownership of a foreign stock.
a.
ADR
b.
SEAQ
c.
Nasdaq
d.
AMEX
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.08
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
20. The first-time issuance of shares by a specific firm to the public is referred to as a(n)
a.
stock repurchase.
b.
secondary stock offering.
c.
initial rights issue.
d.
initial public offering (IPO).
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
21. A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
a.
stock repurchase.
b.
secondary stock offering.
c.
initial rights issue.
d.
initial public offering (IPO).
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
Chapter 10: Stock Offerings and Investor Monitoring
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ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
26. The prevailing price per share divided by the firm’s earnings per share is known as the
a.
dividend yield.
b.
price-earnings ratio.
c.
fully diluted earnings per share.
d.
annual dividend.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
27. The ____ is a value-weighted average of stock prices of 30 large U.S. firms.
a.
Dow Jones Industrial Average
b.
Standard and Poor’s 500
c.
New York Stock Exchange Index
d.
Nasdaq
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
28. The ____ is a value-weighted index of stock prices of 500 large U.S. firms.
a.
Dow Jones Industrial Average
b.
Standard and Poor’s 500
c.
New York Stock Exchange Index
d.
Nasdaq
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
Chapter 10: Stock Offerings and Investor Monitoring
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Page 10
audit committee pre-approves the nonaudit services or not.
d.
It prevents members of a firm’s audit committee from receiving consulting or advising fees or other
compensation from the firm beyond that earned from serving on the board.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.06
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
33. An example of shareholder activism is
a.
communication with the firm.
b.
engaging in a proxy contest.
c.
filing a lawsuit against the board.
d.
all of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.06
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
34. ____ are acquisitions that require substantial amounts of borrowed funds.
a.
Stock repurchases
b.
Corporate controls
c.
Leveraged buyouts
d.
Stock splits
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.07
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
35. ____ are not barriers to corporate control to eliminate agency problems.
a.
Leveraged buyouts
b.
Antitakeover amendments
c.
Poison pills
d.
Golden parachutes
ANSWER:
a
POINTS:
1
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Page 11
36. Listing stock on a foreign stock exchange
a.
may increase the stock’s liquidity.
b.
may enhance the firm’s global image.
c.
may increase the pool of potential investors, making it easier to place an entire issue of stock.
d.
all of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.08
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
37. American depository receipts (ADRs) are similar to
a.
stock options.
b.
bank deposits.
c.
stocks.
d.
bonds.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.08
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
38. ____ are portfolios of international stocks created and managed by various financial institutions.
a.
International mutual funds
b.
American depository receipts
c.
Exchange rate options
d.
Initial public offerings
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.08
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.07
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 10: Stock Offerings and Investor Monitoring
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c.
shareholder lawsuits
d.
All of the above are forms of shareholder activism.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.06
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
43. Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
44. Initial public offerings (IPOs) typically perform ____ on the day of the IPO and ____ for periods of a year or longer
after the IPO.
a.
well; poorly
b.
poorly; well
c.
well; well
d.
poorly; poorly
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
45. Which of the following is not a part of the over-the-counter market?
a.
the Nasdaq
b.
the pink sheets
c.
the OTC Bulletin Board
d.
the New York Stock Exchange
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.05
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Page 14
46. A firm has a current stock price of $15.32. The firm’s annual dividend is $1.14 per share. The firm’s dividend yield is
a.
.74 percent.
b.
1.34 percent.
c.
7.44 percent.
d.
1.14 percent.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
47. If the secondary market for a stock is inactive, then the shares are illiquid.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
48. Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain
funding from a venture capital (VC) fund.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
49. Venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their
money back in one year or less.
a.
True
b.
False
ANSWER:
b
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 15
50. Venture capital (VC) funds commonly serve as advisers to the businesses in which they invest.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
51. Venture capital (VC) funds usually invest in publicly traded businesses.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
52. Venture capital (VC) funds typically plan to exit from their original investment within about one year.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.10.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
53. The phrase “leaving money on the table” refers to investors paying more for a stock in the secondary market than was
paid by those investors who were able to buy shares at the initial (offer) price on the IPO date.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.10.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension