Deck 20: The Market for Corporate

Question 1

A corporation must have at least 2,000 stockholders with 100 or more shares each to qualify for listing on the New York Stock Exchange.

Answer 1

True

Question 2

From 1970 to 2000, the Dow Jones Industrial Average (the Dow 30) has grown approximately ____.

A) 5 times
B) 9 times
C) 14 times
D) 20 times
E) None of the above

Answer 2

14 times

Question 3

In addition to a company's earnings prospects and shareholder perceptions of equity risk affecting stock prices, recent research suggests that these other factors also influence stock prices:

A) Inflation
B) Market interest rates
C) Portfolio diversification
D) All of the above
E) Choices A and B only

Answer 3

Choices A and B only

Question 4

Funding a company through a private sale of stock has several distinct advantages. Among them:

A) Privately-conveyed shares are exempt from costly SEC registration
B) A firm with unproven or questionable credit ratings can be financed
C) Firms always pay less and suffer less ownership dilution with private placements as opposed to public stock offerings
D) All of the above
E) Choices A and B only

Question 5

Holdings of foreign equities by US residents total around ______________, which is approximately three trillion more than foreign investors' holdings of US stocks.

A) $2.5 trillion
B) $3.9 trillion
C) $4.8 trillion
D) $1.2 trillion
E) None of the above

Question 6

Most firms rely upon a mix of _________, ____________, _____________ to fund their ongoing capital investment programs and to this mix of funding may well change depending on where the firm's is in its industry's lifecycle.

A) Retained earnings, stock and equity
B) Retained earnings, Municipal bonds and equity
C) Retained earnings, debt and equity
D) Debt, equity, unretained earnings
E) None of the above

Question 7

The daily trading activity seems to matter with ________________ trades often having more price impact than trades that are the same size occurring ________________ the day.

A) Later; early in
B) Early; in the middle of
C) Early; later in
D) Large; in the middle of
E) None of the above

Question 8

In what important ways does the stock market differ from the other securities markets we have described in earlier parts of this book?

Question 9

What major differences do you see between corporate stock and corporate debt obligations (discussed in the previous chapter)?
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Question 10

What are the essential characteristics of common stock?

Question 11

What priority of claim do common stockholders have in the event a corporation is closed and liquidated? What limits the volume of shares that a company may issue and have outstanding at any point in time?

Question 12

Discuss the nature of preferred stock. In what ways are preferred shares similar to corporate debt and in what ways are they similar to equity shares (especially common stock)?

Question 13

What are the principal differences between trading in stocks over the counter and trading on an organized exchange? How would you rate these two markets in terms of their advantages for the small investor? The large investor?

Question 14

Trading on the organized exchanges is governed by regulations and formal procedures to promote competition and to contribute toward improved liquidity of equity shares.

Question 15

What role do circuit breakers play in the equities market? What are their possible advantages and disadvantages?

Question 16

What is the national market system? Shelf registration?

Question 17

Why did ADRs develop? Why are they important?

Question 18

What is the random walk hypothesis? Does research evidence tend to support or deny the validity of this hypothesis?

Question 19

What is an efficient market? What are the consequences of market efficiency for the behavior of stock prices? Does recent research support the idea that the stock market is efficient?

Question 20

A common stockholder of Milton Corporation is entitled to a pro rata share of any new stock issued by the company. If the firm plans to issue 500,000 new shares at a price of $3.50 per share and this particular stockholder currently holds 1.6 percent of all Milton's shares outstanding, how many new shares is this shareholder entitled to purchase? At what total cost?

Question 21

Riter-Cal Corporation has preferred shares outstanding carrying a $35 par value and promising a 6 percent annual dividend rate. Daniel Smith holds 200 shares of R-C's preferred stock. What annual dividend can he expect to receive if the company's board of directors votes to pay the regular dividend? Suppose R-C's preferred stock consists of participating shares, with preferred shareholders participating equally in net earnings with the firm's common stockholders. If the company declares a $10 per
share common stock dividend, how much in additional per-share dividends will each of its preferred shareholders receive?