9/28/2020 Your Results for "Multiple choice questions"

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Site Title: Fundamentals of Financial Summary of Results

Management, thirteenth edition
21% Correct of 19 Scored items:
Book Title: Fundamentals of Financial
4 Correct: 21%
Management, thirteenth edition
15 Incorrect: 79%
Book Author: Van Horne/Wachowicz
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Location on Student Resources > Chapter 19 >
Site: Multiple choice questions
Date/Time September 28, 2020 at 3:12 PM
Submitted: (UTC/GMT)

1. The preliminary prospectus, which has a statement on its cover that the
registration statement has not yet become effective, is referred to as a (an)
__________.

Your Answer: red herring

2. A market where new securities are bought and sold for the first time is known as a
__________ market.

Your Answer: secondary

Correct Answer: primary

The secondary market is for existing (used) securities rather than new issues.

3. A market for existing (used) securities, such as the NYSE or AMEX, rather than new
issues is known as the __________ market.

Your Answer: tertiary

Correct Answer: secondary

The tertiary market is a phony market, while the secondary market is where
securities are resold after the initial sale.

4. A market for relatively long-term (greater than one year original maturity) financial
instruments (e.g., bonds and stocks) is known as the __________ market.

Your Answer: tertiary

Correct Answer: capital

The tertiary market is a phony market, while the capital market is where relatively
long-term securities are bought and sold.

5. Which securities law requires that public offerings be registered with the federal
government before they are sold?

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Your Answer: Underwritten Rule 144a.

Correct Answer: Securities Exchange Act of 1933.

This is a quasi-private placement where the firm sells to an investment banker who
then sells to investors with registration rights (often).

6. Which securities law regulates the secondary market for long-term securities
already outstanding?

Your Answer: Securities Exchange Act of 1934.

7. An arrangement with a single investment banker or group of investment bankers to

"stand by" and be ready to underwrite any unsold portion of an issue, is referred to
as a (an) __________.

Your Answer: underwriting syndicate

Correct Answer: standby arrangement

This is a temporary combination of investment banking firms formed to sell a new

security issue.

8. Which securities law(s) is (are) involved with state laws regulating the offering and
sale of securities?

Your Answer: Blue Sky Laws.

9. Which of the following is privately placed common stock that cannot be

immediately resold?

Your Answer: Initial public offering.

Correct Answer: Letter stock.

This is a company's first offering of common stock to the general public.

10. Which of the following is a short-term option to buy a certain number of securities
from the issuing corporation?

Your Answer: Initial public offering.

Correct Answer: Right.

This is a company's first offering of common stock to the general public.

11. Which of the following statements is correct regarding asymmetric information?

Your Answer: Asymmetric information is a theory of information flow, which

has been proven to not have relevance in the financial market

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place
Correct Answer: This occurs when one party, say management, has better
information than another party, say investors, about relevant
information to each party.

This is a theory that does indeed have relevance in the financial market place and
is generally accepted that management has better information than investors.

12. A temporary combination of investment banking firms formed to sell a new security
issue, can be referred to as a (an) __________.

Your Answer: standby arrangement

Correct Answer: underwriting syndicate

This is an arrangement with a single investment banker or group of investment

bankers to "stand by" and be ready to underwrite any unsold portion of an issue.

13. What happens, according to the text, to the average common stock price
immediately after the announcement of a new equity issue by a publicly traded
firm?

Your Answer: The average stock price does not generally change because of
asymmetric information.
Correct Answer: The average stock price decreases a few percentage points.

Asymmetric information actually causes investors to bid the stock price down a few
percentage points.

14. The New York Stock Exchange (NYSE) can be considered as being a part of the
__________ and the __________.

Your Answer: capital market; money market

Correct Answer: secondary market for long-term securities; capital market

The NYSE is part of the capital market, but not the money market.

15. Which of the following is not a method a firm can use to publicly issue common
stock?

Your Answer: Private placement.

16. Which of the following is not a method a firm can use to finance their long-term
needs externally?

Your Answer: Public issue.

Correct Answer: Retained earnings.

This is a viable method where the firm uses investment bankers and registers the
securities with the SEC.

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17. How are investment bankers generally compensated under traditional

underwriting?

Your Answer: The issuing firm pays a flat fee, usually $1 million, plus all of
the commissions charge by stockbrokers who are ultimately
selling the securities to investors.
Correct Answer: Investment bankers earn a spread based on the difference
between the purchase price from the firm and the sales price to
investors of the securities being underwritten.

Investment bankers actually earn a spread (sales price -- purchase price of all
underwritten securities).

18. If the market price of a stock "rights-on" is $50 a share, the subscription price is
$40 a share, and it takes nine rights to buy an additional share of common stock,
the theoretical value of a right when the stock is selling "rights-on " is how much?

Your Answer: $1.11

Correct Answer: $1.00

[$50 - $40 ] / [ 9 + 1 ] = $1.00.

19. The __________ is a disclosure document filed with the SEC in order to register a
new security and includes the prospectus and other SEC required information.

Your Answer: standby arrangement

Correct Answer: registration statement

This is an arrangement with a single investment banker or group of investment

bankers to "stand by" and be ready to underwrite any unsold portion of an issue.

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