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Indicate whether the statement is true or false.
1. Venture capital (VC) funds typically plan to exit from their original investment within about one year.
a. True
b. False
2. Managers protected by golden parachutes may be more willing to make decisions that increase the company’s earnings
in the long run, even though the decisions adversely affect the stock price in the short run.
a. True
b. False
3. Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as
the election of the board of directors.
a. True
b. False
4. Research studies have found that the share prices of both target firms and acquiring firms react very positively to
announcements of an acquisition.
a. True
b. False
5. The legal protection of shareholders varies substantially among countries.
a. True
b. False
6. The Dow Jones Industrial Average (DJIA) is a price-weighted average of stock prices of 30 large U.S. firms.
a. True
b. False
7. 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
8. Venture capital funds typically take over businesses and manage them.
a. True
b. False
9. Venture capital (VC) funds commonly serve as advisers to the businesses in which they invest.
a. True
b. False
10. Common law countries such as the United States, Canada, and the United Kingdom allow for more legal protections
for shareholders than civil law countries such as France or Italy.
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b. False
11. Analysts periodically communicate with high-level managers of the firms whose stock they rate.
a. True
b. False
12. The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.
a. True
b. False
13. Venture capital (VC) funds usually invest in publicly traded businesses.
a. True
b. False
14. The Sarbanes-Oxley Act has improved transparency, but investors may still have limited information about publicly
traded firms.
a. True
b. False
15. In general, secondary offerings cause an immediate increase in the market price of the stock.
a. True
b. False
16. 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
17. If managers believe that their firm’s stock price is weak because it is undervalued by the market, they may consider
repurchasing a portion of the shares that are outstanding.
a. True
b. False
18. A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC.
a. True
b. False
19. A venture capital fund typically plans to exit from its original investment within about four to seven years.
a. True
b. False
20. Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.
a. True
b. False
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21. When Facebook engaged in its IPO, there was much uncertainty about its proper valuation, as is typical for stocks
whose valuations are based on expectations of aggressive earnings growth.
a. True
b. False
22. Index-traded funds are passive funds that track a specific index.
a. True
b. False
23. After an IPO, firms commonly list their shares on a private stock exchange.
a. True
b. False
24. In addition to extended sessions offered by the stock exchanges, some electronic communications networks (ECNs)
allow for trading at any time.
a. True
b. False
25. If the secondary market for a stock is inactive, then the shares are illiquid.
a. True
b. False
26. If shareholders become dissatisfied with a firm’s performance, they may engage in a proxy contest in an attempt to
change the composition of the board of directors.
a. True
b. False
27. Most individual investors attend road shows of firms that are about to go public before they purchase shares at the
time of an IPO.
a. True
b. False
28. The OTC market has several segments including the OTCQX and OTC Pink, where smaller stocks are traded.
a. True
b. False
29. Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.
a. True
b. False
30. As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial
information.
a. True
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b. False
31. Crowdfunding is a way that small businesses can raise funds from a number of investors over the Internet.
a. True
b. False
32. 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
33. From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
a. True
b. False
34. International exchange-traded funds (ETFs) represent international stock indexes and thus enable investors to invest in
a specific index representing a particular country’s stock market.
a. True
b. False
35. The government enforcement of securities laws varies among countries.
a. True
b. False
36. All countries that have stock markets have similar laws regarding the financial information that must be provided by
public companies.
a. True
b. False
37. Underwriters sell most or all of the shares of an IPO to institutional investors.
a. True
b. False
38. Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.
a. True
b. False
39. IPOs tend to occur more frequently during recessions.
a. True
b. False
40. The investment by a private equity fund in a business is normally much larger than the typical investment by a venture
capital fund.
a. True
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b. False
41. The OTC market does not have a trading floor.
a. True
b. False
42. 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
43. According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first
day but then declines over time.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
44. 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).
45. ____ are employed by brokerage firms and execute orders for clients on the NYSE.
a. Specialists
b. Commission brokers
c. Venture managers
d. Dealers
46. 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 these are correct.
47. Venture capital funds commonly exit their investment in a business by
a. receiving dividends from the business.
b. engaging in a credit default swap with the business.
c. selling shares of the business when the business engages in an IPO.
d. repurchasing shares of their own stock in the secondary market.
48. The phrase “__________” implies that the company engaged in an IPO could have received a larger amount of funds
had the offer price been set at a higher level.
a. synchronizing the order
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b. covering the spread
c. offsetting the flow
d. leaving money on the table
49. Assume that a firm is valued at $800 million and has 6 million shares of stock outstanding. This firm’s stock should
have a price of $____ per share.
a. 6.00
b. 80.00
c. 133.33
d. None of these are correct.
50. The largest organized exchange in the United States, with the largest market capitalization, is the
a. New York Stock Exchange.
b. American Stock Exchange.
c. Midwest Stock Exchange.
d. Pacific Stock Exchange.
51. 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
52. Designated market movers create liquidity and maintain an orderly market at the
a. New York Stock Exchange.
b. American Stock Exchange.
c. over-the-counter market.
d. Nasdaq.
53. Shareholders can most easily measure a firm’s performance by monitoring changes in its ____ over time.
a. share price
b. employee job descriptions
c. board of directors
d. asset size
54. 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 these are correct.
55. American depository receipts (ADRs) are similar to
a. stock options.
b. bank deposits.
c. stocks.
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d. bonds.
56. Private equity funds tend to use mostly _________ when acquiring stakes in businesses.
a. their equity from issuing common stock
b. their equity from retaining earnings
c. their equity from issuing preferred stock
d. borrowed funds
57. ____ 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
58. 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 these are correct.
59. A road show is a way to
a. promote a secondary offering of stock.
b. arouse interest in an IPO.
c. obtain funding from a venture capital fund.
d. gain support for a shareholders’ lawsuit against a firm’s board of directors.
60. Which of the following is NOT true regarding overallotment options?
a. They are rarely used in IPOs.
b. They allow the underwriter to allocate an additional 15 percent of the shares of the firm engaging in an IPO.
c. They allow the underwriter to purchase additional shares at the IPO offer price.
d. They can be used to help stabilize the stock price in the days after an IPO.
61. ____ are acquisitions that require substantial amounts of borrowed funds.
a. Stock repurchases
b. Corporate controls
c. Leveraged buyouts
d. Stock splits
62. 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
63. Preferred shareholders
a. typically have the same voting rights as common shareholders.
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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.
64. 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.
65. 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 these are correct.
66. Which of the following is NOT true with respect to preferred stock?
a. Preferred stock usually does not allow for significant voting rights.
b. If the firm does not have sufficient earnings to pay the preferred stock dividends, the preferred shareholders may
force the firm into bankruptcy.
c. Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual
dividend.
d. Payment of preferred dividends is not a tax-deductible expense.
e. All of these are correct.
67. Which of the following is NOT a form of shareholder activism?
a. proxy contests
b. poison pills
c. shareholder lawsuits
d. None of these are correct.
68. A(n) ____ represents ownership of a foreign stock.
a. ADR
b. SEAQ
c. Nasdaq
d. AMEX
69. 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
70. ____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed
by portfolio managers.
a. International mutual funds
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b. American depository receipts
c. World equity depository receipts
d. Initial public depository receipts
71. Possible disadvantages of private stock exchanges to investors include
a. only large institutional investors may purchase shares in privately listed stocks.
b. required disclosures may be less than those required when a firm goes public.
c. trading volume is limited.
d. required disclosures may be less than those required when a firm goes public AND trading volume is limited.
72. 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.
73. Firms listed on the OTC Pink market
a. are typically very large.
b. satisfy the Nasdaq’s listing requirements.
c. are typically owned by major institutional and individual investors.
d. do not have to register with the Securities and Exchange Commission.
74. In preparing for an IPO, a prospectus must be filed with the
a. stock market where the firm will be listed.
b. Securities and Exchange Commission.
c. Consumer Financial Protection Bureau.
d. Federal Trade Commission.
75. Sudden favorable news about the performance of a firm will make investors believe that the firm’s stock is ____ at its
prevailing price.
a. overvalued
b. fixed
c. appropriate
d. undervalued
76. To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that
retain shares for a ____ period of time.
a. fewer; long
b. more; short
c. more; long
d. fewer; long AND more; short
77. The owners of common stock are permitted to vote on the
a. election of the board of directors.
b. authorization to issue new shares of common stock.
c. approval of amendments to the corporate charter.
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d. adoption of bylaws.
e. All of these are correct.
78. When brokers encourage investors to place first-day bids for IPO shares that are above the offer price, this is referred
to as
a. flipping.
b. spinning.
c. laddering.
d. None of these are correct.
79. A firm whose stock price has risen
a. will not have to pay a premium if it acquires another firm.
b. has an incentive to use its stock as currency to acquire the shares of a target firm.
c. is likely to be a candidate for a leveraged buyout.
d. is likely to repurchase some of its shares.
80. 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
81. Which of the following is NOT a part of the over-the-counter market?
a. the OTCQB
b. the OTC Pink
c. the OTC Bulletin Board
d. the New York Stock Exchange
82. 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.
83. Which of the following is NOT a barrier to corporate control?
a. antitakeover amendments
b. proxy contests
c. poison pills
d. golden parachutes
e. All of these are barriers to corporate control.
84. A firm will typically attempt to sell shares from a secondary offering
a. far below the prevailing market price.
b. far above the prevailing market price.
c. at the prevailing market price.
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d. at the offer price of the IPO.
85. 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
86. 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
87. 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.
88. 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 these are correct.
89. When a firm buys some of its shares that it had previously issued, this is referred to as a
a. reverse IPO.
b. leveraged buyout.
c. ladder spin.
d. stock repurchase.
90. Whenever _____ the stock price will be driven up.
a. supply exceeds demand
b. demand exceeds supply
c. demand is reduced
d. None of these are correct.
91. 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).
92. Which of the following is NOT true regarding the Sarbanes-Oxley Act?
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a. It requires firms to establish an internal control process for their financial reporting.
b. It requires a firm’s CEO and CFO to certify that the audited financial statements are accurate.
c. It allows a public accounting firm to audit a client firm whose CEO was employed by the accounting firm six
months earlier.
d. It prevents a firm from providing excessive compensation to members of its audit committee so that they will not
closely oversee the audit.
93. ____ are not barriers to corporate control to eliminate agency problems.
a. Leveraged buyouts
b. Antitakeover amendments
c. Poison pills
d. Golden parachutes
94. When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving
them
a. preemptive rights.
b. limit orders.
c. subscription rights.
d. presumptive rights.
95. Which of the following is NOT true with respect to initial public offerings (IPOs)?
a. IPOs are first-time offerings of shares by a specific firm to the public.
b. Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock to issue and the
asking price for the stock.
c. Owners of firms that engage in IPOs are normally required to retain their shares for at least three years before
selling them in the secondary market.
d. IPOs are typically intended to raise funds so the corporation can expand.
96. Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding
shares is relatively
a. high.
b. low.
c. either high or low, depending on the overall market.
d. None of these are correct.
97. Which of the following is NOT likely to be included in a stock quotation?
a. the stock’s 52-week price range
b. the stock’s dividend yield
c. the stock’s average price over the previous year
d. the stock’s price-earnings ratio
98. Which of the following is NOT true with respect to venture capital (VC) funds?
a. When a VC fund decides to invest in a business, it will set out clear requirements that the business must meet to
receive the funding.
b. A VC fund commonly sells its equity stake in a firm to the public before the firm engages in an IPO.
c. VC funds receive money from wealthy investors and pension funds that are willing to maintain the investment for
a long-term period.
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d. All of these are true with respect to VC funds.
99. Private equity funds may exit their investment in a business by
a. selling their stake to another company.
b. engaging in a credit default swap with the business.
c. investing in shares of the business when the business engages in an IPO.
d. repurchasing shares of their own stock in the secondary market.
100. 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.
101. For many IPOs, the lead underwriter has a(an) _______ option, which allows it to allocate an additional 15 percent of
the firm’s shares for a period of up to 30 days after the IPO.
a. credit default
b. quantitative
c. overallotment
d. lockup
102. On average, firms that have had IPOs tend to perform ____ over a period of a year or longer.
a. well
b. poorly
c. about the same as the S&P 500 index
d. None of these are correct.
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Answer Key
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