Deck 19: Using Securities Markets for Financing and Investing Opportunities

Question 1

Only government employees represent institutional investors.

Answer 1

False

Question 2

In a secondary market sale of stock, the proceeds go to the investor selling the stock, not to the corporation.

Answer 2

True

Question 3

Many observers suggest that the stock market is dominated by the buying and selling activities of institutional investors.

Answer 3

True

Question 4

Securities markets help companies raise long-term debt and equity financing.

Question 5

Issuing stock is considered equity financing.

Question 6

Securities markets represent the financial marketplaces for stocks and bonds.

Question 7

Corporations sell a new issuance of securities in the Primary Market.

Question 8

Examples of institutional investors are pension funds, mutual funds, and insurance companies.

Question 9

It is easier for a small business to raise funds through a stock issuance than for a large, well-known company.

Question 10

The primary market allows an investor to purchase financial securities from other investors.

Question 11

When given a choice, businesses prefer to obtain long-term financing through retained earnings or by borrowing from a lending institution such as a bank.

Question 12

When investment bankers underwrite an issue, they buy at a discounted price, the entire stock issue of a firm and then sell the stock, at full price, to private investors.

Question 13

Investment bankers assist in the issuing and selling of new securities.

Question 14

The proceeds from a secondary market sale of securities go to the corporation whose security is being traded.

Question 15

An initial public offering (IPO) represents the first time a corporation's stock is offered and sold to persons outside of the company.

Question 16

Before issuing stock or bonds, corporations must meet the disclosure requirements of the Federal Trade Commission (FTC).

Question 17

The secondary market is where investors (both individuals and companies) go to find someone who is interested in selling their investments to them.

Question 18

The New York Stock Exchange will underwrite new issues of stocks or bonds.

Question 19

Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.

Question 20

An investment banking firm assists corporations in selling the new security issue.

Question 21

Only those individuals and/or companies with a membership on a stock exchange can buy and sell securities on that stock exchange.

Question 22

Stocks that are not listed as trading on one of the national or international stock exchanges can be traded on the OTC, Over-The- Counter exchange.

Question 23

Sam Schiester, a stockbroker at Schemes Financial Services Company called you the other day asking if you would like to purchase an IPO. "The hot new company, Hottie Potatee is going public, and I thought you might want to get in on it," he exclaimed. If you agree to buy shares of this company, this trade will occur on the secondary market.

Question 24

Investors who trade securities, buy securities they are interested in holding or sell securities to make a profit or cut losses by trading in the secondary market.

Question 25

The NASDAQ is a floor-based exchange.

Question 26

Securities and Exchange Commission (SEC) rules prohibit the listing of the stock of foreign firms on U.S. stock exchanges.

Question 27

The stock of companies that fail to meet a stock exchange's minimum requirements can be delisted.

Question 28

A stock exchange provides a marketplace where the public can directly buy and sell securities without the help of intermediaries.

Question 29

Ina Vestor inherited $75,000 when her grandfather died and decided to invest it in the Hottie Potatee company. As a student of business, you inform her that she can call a stockbroker who will help her purchase stock on the secondary market.

Question 30

The over-the-counter market utilizes an electronic securities trading system.

Question 31

The NYSE purchased Archipelago Holdings, Inc., in order to move from a floor-based exchange system to an electronic trading system.

Question 32

The Securities and Exchange Commission does not intercede in any way in the process of an IPO. Doing so would disrupt the natural process of the capital markets.

Question 33

Your privately held firm needs additional funding for a planned expansion. Having never issued stock to the public, your firm is well advised to seek the assistance of an investment banker prior to an initial public offering of stock.

Question 34

If investor Jones buys a share of stock in the ABC Corporation from investor Smith, the ABC Corporation automatically receives a fixed percentage of the selling price.

Question 35

Government employees, public school system employees, and even employees of some large companies pay a percentage of their monthly earnings into pension funds. These funds collect a large pool of money that they invest in securities. Pension funds, insurance companies and mutual fund companies - who collect large sums of money and then invest these funds into stocks, bonds or other securities are called institutional investors.

Question 36

Idle Time Gaming, Inc., has reached a point in its life where it needs several million dollars in order to expand and become the international company that it says it wants to be in its strategic plan. After consulting with an investment banker who is willing to underwrite the issue, it learned that investors will purchase the stock for $22/share. Idle time will receive a smaller amount for each share that is sold.

Question 37

Corporations receive needed funds when they sell a new issuance of a security in the primary market.

Question 38

Investment bankers are in the business of underwriting securities. They profit from purchasing the new stock offering of a corporation at a discount, and then selling those shares of stock to the public at the market price.

Question 39

Institutional investors include insurance companies, individual investors, and mutual funds.

Question 40

Hottie Potatee, Inc. wants to raise an undisclosed amount of funds in order to expand the company-owned potato bar stores overseas. The CFO (Chief Financial Officer) of the company will negotiate with an expert at the FTC (Federal Trade Commission) who will underwrite the issue of stock that Hottie Potatee plans to offer.

Question 41

Purchasing stock from a foreign company whose home nation has an unstable currency or government is a relatively safe investment because you are not exchanging currency, you are exchanging stock.

Question 42

When thinking about purchasing foreign company stocks, U.S investors should proceed with caution if the foreign company's home nation has political unrest.

Question 43

Once a stock exchange agrees to list a company, the firm can be assured that it will always be listed by that exchange.

Question 44

According to the "Reaching Beyond Our Borders" box in Chapter 19, purchasing ADRs is one way that U.S. investors participate in the global securities market.

Question 45

Before a corporation's stock can be sold on a major stock exchange, the firm must provide detailed financial information to the Securities and Exchange Commission.

Question 46

Well-known foreign exchanges that also exchange the securities of U.S. firms include the London Exchange and the Tokyo Exchange.

Question 47

Insider trading laws prevent employees from buying or selling the securities of their employers.

Question 48

The number of U.S. companies that are listed on foreign stock exchanges is declining.

Question 49

Insider trading involves the sale of stock to employees at discounted prices.

Question 50

Stock exchanges exist all over the world, allowing investors to buy securities in companies almost anywhere in the world.

Question 51

According to the Securities Act of 1933 it is against the law for a firm that is publicly trading securities to deny an investor from knowing how the firm is doing financially.

Question 52

Insider trading refers to someone who benefits unfairly from information about a security not available to the general public.

Question 53

An executive secretary at a major investment banking firm is asked to copy documents that detail a major merger that's going to be finalized in the next two weeks. This merger will be a positive outcome for one of the company's in this deal. The secretary is thrilled to read about the merger, plans to call her broker immediately and buy stock in the company, and suggests that you should also act on her stock tip. Since you are not employed at her firm your purchase is legal.

Question 54

If you want to buy the stocks of largely capitalized companies (companies with millions, and even billions worth of assets), your broker will need to make the trade through the NYSE Euronext.

Question 55

In an effort to profit from stock market trading, Chad landed a job with the ABC Corporation. Chad intends to use his position to obtain privileged information about his new employer that would not be available to the public. While Chad realizes that he may be benefiting unfairly, as an employee he is not acting illegally.

Question 56

Stock exchanges compete with each other for the listing of a corporation's stock.

Question 57

The prospectus is summarization of the results of detailed financial documents that a firm files with the SEC prior to being given approval to issue securities.

Question 58

The Securities and Exchange Commission requires that all prospective investors receive a copy of a firm's prospectus prior to investing.

Question 59

Many foreign firms are listed on the NYSE Euronext.

Question 60

In 2008, the NYSE Euronext purchased AMEX, creating the world's largest exchange.

Question 61

Preferred stock may include callable and convertible provisions.

Question 62

Par value reflects the current market price for a stock.

Question 63

Corporate management decisions are influenced by the desire to keep stockholders happy.

Question 64

CEOs often receive additional compensation if the firm's stock price appreciates. The Making Ethical Decisions box, titled, "Wagging the Dog", provides the student with a view of the kinds of ethical decisions that CEOS face. CEOs are often asked to consider the best interest of the firm and its employees, before their own self-interest.

Question 65

If the firm should find itself in bankruptcy, preferred stockholders would have claim to the value of any remaining assets before common stockholders.

Question 66

When a corporation enjoys a profitable year, dividends must be paid.

Question 67

Stocks represent shares of ownership in a company.

Question 68

Issuing new stock increases the firm's outstanding debt on their balance sheet.

Question 69

Preemptive rights provide common stockholders the first right to purchase any new shares of common stock issued by the firm.

Question 70

In the Making Ethical Decisions box in Chapter 19, the CEO of the pet food company had a personal dilemma: benefit a lot at the expense of others in the company, or benefit a little, and make certain that others with a stake in the business, benefit too.

Question 71

Cumulative preferred stockholders enjoy the first right to purchase any new shares of stock issued by the firm.

Question 72

Long-term funds acquired through the sale of stock are not required to be repaid to the investor.

Question 73

Although companies that issue bonds are required to pay interest, companies issuing stock are not required to pay dividends.

Question 74

Dividends represent a portion of a firm's profits that are distributed to bondholders first then stockholders.

Question 75

If paid, dividends come from any profits remaining after the firm has paid taxes. The company cannot deduct dividends as an expense of doing business.

Question 76

Common stock and corporate bonds represent the two types of equity financing available to a firm.

Question 77

Stock certificates identify per share dividends, expressed as a percentage of par value.

Question 78

Preferred stockholders have voting rights privileges not shared by common stockholders.

Question 79

Issuing new common stock usually expands ownership, giving all owners the right to vote for the firm's board of directors.

Question 80

Preferred stockholders receive dividend payments before common stockholders are paid any dividends.