Quiz 1

A  It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed.

B  IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.

C  The term “IPO” stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.

D  When the stock of a closely held corporation is offered to the public for the first time, it is said that the company is going public.

A  Mutual funds are asset management companies that accept money from savers and then use them to buy stocks and bonds.

B  Commercial banks accept deposits from customers and lend money.

C  Pension funds invests in stocks and bonds the money they receive from workers saving from retirement.

D  Hedge funds are highly regulated as they are considered very risky investments that can destabilize the financial markets.

A  If an investor sells 100 shares of Microsoft to his brother-in-law, this is a primary market transaction.

B  Money markets are where long-term, liquid securities are traded, whereas capital markets represent the markets for short-term debt and common stock.

C  Private securities are generally less liquid than publicly traded securities.

D  The holders of debt securities are owners in the company.

A  Capital markets deal only with common stocks and other equity securities.

B  The New York Stock Exchange is an auction market, and it has a physical location.

C  Home mortgage loans are traded in the money market.

D  If an investor sells shares of stock through a broker, then it would be a primary market transaction.

A  Consumer automobile loans.

B  Short-term debt securities such as Treasury bills and commercial paper.

C  Foreign currencies.

D  Common stocks.

A  If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

B  Capital market instruments include both long-term debt and common stocks.

C  An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.

D  The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.

A  The threat of takeovers tends to reduce potential conflicts between stockholders and managers.

B  The threat of takeover generally increases potential conflicts between stockholders and managers.

C  Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.

D  One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm’s capital structure.

A  If a lower level person in a firm does something illegal, like “cooking the books” to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

B  There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.

C  Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.

D  If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.

A  Corporations generally find it easier to raise large amounts of capital.

B  Corporations generally face fewer regulations.

C  Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

D  Less of a corporation’s income is generally subject to federal taxes.

A  One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.

B  It is easier to transfer one’s ownership interest in a partnership than in a corporation.

C  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.”

D  One of the advantages of the corporate form of organization is that it avoids double taxation.