Chapter 19 Quiz

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Question #1

Game Guys, Inc., needs several million dollars to expand and follow its strategic plan. In negotiations with the investment banker, they agree to issue 50 million shares of common stock, at $25/share. If the investment banker’s fee for underwriting the total sale is 5.82%, what is the discounted price that the investment bank is willing to pay Game Guys for the shares?

A around $140,000,000

B around $120,000,000

C around $14,000

D around $1,200,000,000

Question #2

Jacob impresses his friends by stating that he just cast four votes in the election of the board of directors of Epic Electronics, indicating that Jacob owns ________ stock in Epic Electronics.

A preferred

B registered

C common

D cumulative preferred

Question #3

To reduce the risk of investing in an individual stock, an ownership position in many different companies can be achieved by purchasing shares in a(n)

A diversification bond.

B indexed security.

C stock cooperative.

D mutual fund.

Question #4

The risk associated with Firm A’s bond is greater than the risk of Firm B’s bond. All other things being equal, investors would be willing to pay ________ for Firm B’s bond.

A a premium

B less

C the same

D more

Question #5

If a stock’s closing price for the day is 32.47, the stock’s price in U.S. dollars would be

A $32.47

B in between a low of $32 and a high of $47.

C $3,247

D $32 plus a $.47 commission.

Question #6

The risk/return trade-off investors assume means

A the less you risk, the more you stand to gain.

B the goal is to never risk liquidity; your investments should always be liquid and of short duration.

C the same as diversification of your portfolio.

D you will assume added risk, if you believe you can get a greater return.

Question #7

After buying 200 shares of common stock in Epic Electronics for $20 per share, Rashad later sold the same shares for $25 per share. Rashad’s capital gain on the total transaction is:

A $110

B $10

C $1,500

D $1,000

Question #8

Tressan wants to purchase stock in a company that is headquartered in Australia. Tressan

A cannot legally own the stock of a Australian corporation.

B must obtain an investor visa to complete the purchase.

C will have to place her order through the Sydney Stock Exchange.

D can buy the shares from a broker on a U.S. exchange.

Question #9

Having just returned from serving with the U.S. Marines in Afghanistan, Nick has managed to save most of his earnings. He has enrolled in the local community college and he is back living with his parents while he assimilates back into U.S. life. As his business major friend, he has come to you for advice. He would like to see his $40,000 savings grow, yet he knows that he will need it in about five years when he and his girlfriend are out of school and make plans to get married. He also worries that his car may break down and he will need to invest in another used car. Which of the following would you suggest for Nick?

A In order for Nick to see growth, he will need to place the entire $40,000 in one stock offering. You suggest a biotech stock that promises growth.

B Since liquidity is a concern, Nick would do best to diversify into four to eight different investments, and keep a reasonable amount in cash (a savings account) for emergencies.

C Nick is still young. He needs to consider high-growth, higher-risk stocks and corporate bonds. He is young enough to recoup his investment if it should experience a loss.

D Nick should determine what types of companies he is passionate about. He should lead with his heart, but should be warned that some of those companies will produce better yields than others.

Question #10

Which of the following terms best describes the relationship between the New York Stock Exchange and the NASDAQ?

A cooperative

B competitive

C disastrous

D dependent

Question #11

One criticism of the Dow Jones Industrial Average suggests that it

A is biased causing an overstatement of bond price increases and an understatement of stock price decreases.

B does not indicate the cause of changes in stock prices.

C is too small (too few companies) to get a good statistical representation

D magnifies the fluctuations in the stock market.

Question #12

Standard & Poor’s currently rates Careful Corporation bonds as a D grade. This indicates that these bonds are

A corporate bonds with variable interest rates.

B moderately speculative.

C of the highest quality with lowest default risk.

D the lowest quality and the highest risk.

Question #13

After operating for years as a privately held corporation, Iron Age Metalworks plans to publicly trade its stock. As a midsized firm, Iron Age wants to avoid excessive paperwork, and the fear of being delisted in the future. The ________ provides the best fit for Iron Age’s plans.

A American Stock Exchange

B New York Stock Exchange

C over-the-counter market

D secondary market

Question #14

Private investors benefit from securities markets primarily by

A securing memberships on various stock exchanges.

B obtaining the capital they need to finance their operations.

C having a place to buy and sell stocks and bonds.

D participating in the primary markets of investment bankers.

Question #15

The new issue $1,000 face value bonds due in 2030 issued by Bathtub Brewing Company are seen by investors as less attractive than other bonds offered by other businesses at the same time. The coupon rate attached to these bonds will need to be ________ than other corporate bond issues in order to attract investors.

A the same

B lower

C not important because it is a new issue

D higher

Question #16

Callahan and Megan plan to invest in corporate securities. While Callahan plans to retire next year on his 65th birthday, Megan is celebrating her first job after college and her 22nd birthday. Which of the two investors would be well advised to choose a more conservative investment strategy?

A Callahan

B Megan

C A conservative investment strategy is always the best strategy for both of them.

D It depends on whether they want to invest in stocks or bonds.

Question #17

Corporations receive the proceeds for the sale of their stock in

A venture capital markets.

B the secondary market.

C the primary market.

D both primary and secondary markets.

Question #18

Mini-Case

Penny Stock is the chairperson of Pirate Recording Company Inc. She is the person responsible for the tremendous growth this company has enjoyed over the past three years. It was Penny’s intuition and clever negotiating that enabled the company to sign two very hot recording artists: Half a Dollar and N’elli. These groups have generated profits of over $25 million.

The future looks even brighter at the firm because several current and aspiring entertainers have indicated an interest in signing on with Pirate Recording. This incredible growth has delighted everyone at the company, but it has also created a major problem for Penny. Pirate Recording has never been a major player in the recording industry, primarily because of limited capital. In order to take the company to the next level Penny realizes that she will need to expand the firm’s personnel and equipment. The amount of new funds required to finance this needed expansion is $150 million. Penny has started to consult with others about how to finance this major expansion of the company.

If Pirate Recording elects to offer an Initial Public Offering (IPO), it will involve preparing full financial disclosure with the ________. The firm is advised to solicit the services of an investment banker/underwriter, who will analyze the market and determine the best price for the new issue of Pirate Recording stock. The offering will then be sold on the ________.

A Fair Trade Commission; primary market

B Federal Trade Commission; secondary market

C Internal Revenue Service; secondary market

D Securities and Exchange Commission; primary market

Question #19

Investors in ________ preferred stock receive a guarantee that missed dividends will accumulate and potentially be paid later.

A superior

B convertible

C participating

D cumulative

Question #20