Question 1

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

Accepted Answer

Direct finance involves the sale of financial instruments such as bonds and stocks by corporations and governments to savers and investors. Loans to corporations through the sale of corporate bonds take place in the direct finance market.

Question 2

Stock prices are

Accepted Answer

Stock prices are generally based more on the expected future profitability of firms rather than their current profitability. This is because investors are interested in the potential future growth of the company and its ability to generate profits in the long run, rather than just its current financial performance. Factors like industry trends, market conditions, and company management all play a role in shaping investor expectations about future profits and stock price performance.

Question 3

Bonds ________ and stocks ________.

Accepted Answer

Bonds typically have a fixed number of interest payments, while stocks may pay dividends indefinitely. Stocks are not obligated to pay dividends, but they may choose to do so based on their profitability and financial goals.

Question 4

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

Accepted Answer

A bond represents a promise to repay a combination of a yearly interest payment and a principal payment at maturity.

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

An increase in coupon payments on newly-issued bonds will make your bond less attractive to potential buyers since they can get a higher return on new bonds. Therefore, the price of your bond will decrease.

Question 6

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, investors are more likely to purchase those bonds rather than older, outstanding bonds with lower coupon rates. As a result, the demand for the older bonds decreases and their market price falls in the secondary market.

Question 7

Dividends are

Accepted Answer

Dividends are payments made by a corporation to its shareholders, typically in the form of cash or additional shares of stock. They represent a portion of the company's profits that are distributed to its owners. Dividends are not payments on bonds, which typically pay interest to bondholders.

Question 8

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 increases its equity financing, which in turn increases the firm's financial capital. Therefore, the correct answer is A - the firm's financial capital would increase.

Question 9

Article Summary
In an effort to raise funds to cut debt,Fiat Chrysler is selling a stake in Ferrari through an initial public offering (IPO)to be valued at as much as $9.8 billion.17.2 million shares of stock in the company are to be sold,and the stock will be traded on the New York Stock Exchange under the symbol RACE.One analyst speculates that requests for shares in Ferrari may be ten times less than the number available.Including debt,Ferrari will have a value of about $12 billion,and chairman Piero Ferrari will keep a 10 percent stake in the new company and receive about €280 million in cash.Before taxes and interest,Ferrari's 2014 earnings were €389 million,with revenue of €2.8 billion.
-When Ferrari sells stock to the public in its IPO,it will do so through the New York Stock Exchange.This is an example of Ferrari raising funds through

Accepted Answer

Ferrari is raising funds through the sale of shares to the public, which will be traded on the New York Stock Exchange. This represents the use of a financial market to raise capital.

Question 10

All of the following are characteristics of stock except

Accepted Answer

Stock does not promise to repay a fixed amount of funds; instead, owning stock represents ownership in a firm. Dividends paid to owners of stock represent a firm's profits, but the stock itself does not promise any repayment of funds.

Question 11

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 by multiplying the face value of the bond ($1,000) by the interest rate (7%) which gives $70. Therefore, the correct answer is C, $70.

Question 12

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 13

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 bond's current price results in the bond's current yield. The dividend yield and price-earnings ratio are relevant for stocks, not bonds. The maturity value is the amount the bond will pay when it reaches its maturity date.

Question 14

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 15

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

Accepted Answer

Profits that are reinvested in a firm rather than paid to the firm's owners are called retained earnings. They are accumulated over time and invested back into the company for growth and expansion. Dividends are payments made to the owners or investors of a firm, usually in the form of cash or stock. Stock options are a form of compensation given to employees. Corporate bonds are a type of debt instrument issued by companies to raise funds.

Question 16

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 17

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 to the public for the first time, it is known as the primary market. Therefore, the first part of the statement refers to the primary market. However, when those shares are later resold to other buyers, it is known as the secondary market. Therefore, the second part of the statement refers to the secondary market.

Question 18

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

Accepted Answer

It is the financial system of an economy that transfers funds from savers to borrowers. This includes banks, credit unions, investment firms, and other financial institutions that facilitate transactions between those who have excess funds and those who need to borrow money. The Federal Reserve and federal government play important roles in regulating and overseeing the financial system, but they are not directly responsible for transferring funds between savers and borrowers. Corporate governance refers to the internal management and decision-making processes of individual companies and does not involve the transfer of funds between parties.

Question 19

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 20

Article Summary
In an effort to raise funds to cut debt,Fiat Chrysler is selling a stake in Ferrari through an initial public offering (IPO)to be valued at as much as $9.8 billion.17.2 million shares of stock in the company are to be sold,and the stock will be traded on the New York Stock Exchange under the symbol RACE.One analyst speculates that requests for shares in Ferrari may be ten times less than the number available.Including debt,Ferrari will have a value of about $12 billion,and chairman Piero Ferrari will keep a 10 percent stake in the new company and receive about €280 million in cash.Before taxes and interest,Ferrari's 2014 earnings were €389 million,with revenue of €2.8 billion.
-When Ferrari sells stock to the public in its IPO,it will do so through the New York Stock Exchange.This is an example of Ferrari using ________ to raise funds.

Accepted Answer

Ferrari is using direct finance by selling its stock to the public through an IPO on the New York Stock Exchange to raise funds.

Quiz 8: Firms,the Stock Market,and Corporate Governance