Question 1

Walmart wants to raise $250 million to finance the renovation of their retail stores,and the company wishes to raise the funds through indirect finance.Which of the following methods could it use?

Accepted Answer

The answer of Walmart wants to raise $250 million to...

Question 2

When the coupon rate on newly issued bonds increases relative to older,outstanding bonds,what happens?

Accepted Answer

When the coupon rate on newly issued bonds increases relative to older, outstanding bonds, investors will demand a higher yield on the older bonds to compensate for the lower coupon rate. This leads to a decrease in the market price of the older bond in the secondary market.

Question 3

Bonds ________ and stocks ________.

Accepted Answer

Bonds have a fixed number of interest payments, while stocks may pay dividends forever. Stocks also have the potential for capital appreciation, whereas bonds have a fixed payout at maturity.

Question 4

Despite a shaky start, online used car seller Carvana sold all 15 million stock shares in its IPO and raised about $225 million. Initially priced at $15 per share, the stock closed at $11.10 per share at the end of the first trading day. The Phoenix-based company, known for its automated car vending machines, offers free next-day delivery to residents in 24 markets across the United States. Carvana, founded in 2012, has seen large revenue growth but has never reported a profit., losing about $93 million in 2016. The company also said in its S-1 IPO filing that it expects losses to continue in the near future.
Source: Kirsten Korosec, "Used Car Vending Machine IPO Sputters In First Day of Trading," Fortune, April 28, 2017.
-When Carvana sold stock to the public in its IPO,it did so through the New York Stock Exchange.This is an example of Carvana using ________ to raise funds.

Accepted Answer

Carvana's sale of stock in its IPO is an example of direct finance, as the company is directly selling ownership shares to investors in order to raise funds. Indirect finance involves using financial intermediaries to facilitate borrowing and lending between investors and borrowers. Carvana did not issue bonds as part of its IPO. Corporate governance refers to the systems and processes in place within a company to ensure accountability and transparency to shareholders and stakeholders.

Question 5

You have a bond that pays $60 per year in coupon payments.Which of the following would result in a decrease in the price of your bond?

Accepted Answer

A decrease in the price of a bond is typically caused by an increase in the market interest rate. If newly-issued bonds offer higher coupon payments of $75 per year, investors will demand a higher rate of return on existing bonds to compensate for the lower yield. This would cause the price of existing bonds to fall. The other options (A, B, and C) are not likely to affect the price of the bond in question.

Question 6

A bond's coupon payment divided by the bond's current price is equal to the bond's

Accepted Answer

The coupon payment divided by the current price of the bond gives the current yield, which represents the annual return on the bond based on its current market price.

Question 7

Profits that are reinvested in a firm rather than paid to the firm's owners are called

Accepted Answer

Retained earnings are profits that are reinvested in a firm rather than paid to the firm's owners as dividends. Stock options are a form of compensation for employees that allows them to purchase company stock at a predetermined price. Corporate bonds are debt securities issued by companies to borrow money from investors.

Question 8

All of the following are characteristics of stock except

Accepted Answer

Stock does not promise to repay a fixed amount of funds to stock owners. Instead, stock represents ownership in a firm and dividends paid to owners represent a firm's profits.

Question 9

Dividends are

Accepted Answer

Dividends are payments made by a corporation to its shareholders as a share of profits. They are not interest or principal payments on bonds, nor are they fixed payments to bondholders.

Question 10

Stock prices are

Accepted Answer

Stock prices are based less on the current profitability of firms than on their expected future profitability. Investors buy stocks in anticipation of future profits and growth, which can be influenced by many factors such as market trends, competition, and economic conditions. Therefore, stock prices are often a reflection of the market's expectations for a company's future profitability rather than solely focusing on its current profitability.

Question 11

Which of the following takes place in the direct finance market?

Accepted Answer

The direct finance market involves the sale of financial instruments such as stocks and bonds directly to savers or investors by the borrower, without the involvement of a financial intermediary such as a bank. Option C refers to the sale of corporate bonds in the direct finance market. Options A, B, and D all involve the involvement of financial intermediaries, and therefore do not take place in the direct finance market.

Question 12

If a corporate bond with face value of $1,000 has an interest rate of seven percent paid once a year for a term of 10 years,what is the size of the coupon payment?

Accepted Answer

The coupon payment is calculated as the product of the interest rate and the face value of the bond, divided by the number of coupon payments per year. In this case, there is only one coupon payment per year, so the coupon payment is:
(0.07 x 1000) / 1 = $70

Question 13

Generally with bond ratings,the lower the rating,the ________ the interest rate an investor will receive and the ________ the the risk that the issuer of the bond will default.

Accepted Answer

The answer of Generally with bond ratings,the lower the rating,the...

Question 14

If a corporate bond with a face value of $20,000 pays yearly coupon payments of $500,what is the coupon rate?

Accepted Answer

The coupon rate is calculated by dividing the annual coupon payment by the face value of the bond. Here, it's $500 / $20,000 = 0.025 or 2.5%.

Question 15

When Zynga,the company behind the social games CityVille and Words With Friends,sold stock to the public for the first time in December 2011,funds were being raised in a ________ market,and when those newly issued shares are resold to other buyers,the sales take place in a ________ market.

Accepted Answer

When a company sells stock for the first time to the public, it does so in a primary market. When those shares are later resold to other buyers, the sales take place in a secondary market. Therefore, when Zynga sold stock to the public for the first time in December 2011, it was in a primary market, and when those shares are resold to other buyers, the sales take place in a secondary market.

Question 16

If a firm raises funds by recruiting additional owners to invest in the firm

Accepted Answer

When a firm recruits additional owners to invest in the firm, it is typically done through the sale of stocks, which increases the financial capital of the firm.

Question 17

It is the role of ________ to transfer funds from savers to borrowers.

Accepted Answer

The financial system of an economy, consisting of banks, credit unions, financial markets, and other intermediaries, is responsible for transferring funds from savers to borrowers. This process, known as financial intermediation, allows individuals and businesses to obtain the funding they need to invest in new projects or expand their operations, while also providing a return for savers in the form of interest or dividends. The government and the Federal Reserve play important roles in regulating and supervising the financial system, but they do not directly transfer funds from savers to borrowers. Similarly, while corporate governance can impact a firm's ability to obtain financing, it does not have a direct role in the broader process of financial intermediation.

Question 18

If Walmart issues $250 million in new stock to finance the renovation of their retail stores,this is an example of

Accepted Answer

The answer of If Walmart issues $250 million in new...

Question 19

A bond is a financial security that represents a promise to repay

Accepted Answer

A bond represents a promise to repay both a yearly interest payment and a principal payment at the maturity date.

Question 20

Despite a shaky start, online used car seller Carvana sold all 15 million stock shares in its IPO and raised about $225 million. Initially priced at $15 per share, the stock closed at $11.10 per share at the end of the first trading day. The Phoenix-based company, known for its automated car vending machines, offers free next-day delivery to residents in 24 markets across the United States. Carvana, founded in 2012, has seen large revenue growth but has never reported a profit., losing about $93 million in 2016. The company also said in its S-1 IPO filing that it expects losses to continue in the near future.
Source: Kirsten Korosec, "Used Car Vending Machine IPO Sputters In First Day of Trading," Fortune, April 28, 2017.
-When Carvana sold stock to the public in its IPO,it did so through the New York Stock Exchange.This is an example of Carvana raising funds through

Accepted Answer

Carvana sold stock to the public in its IPO through the New York Stock Exchange, which is a financial market where companies can raise funds by selling securities to investors.

Quiz 6: Firms, The Stock Market, and Corporate Governance