Question 1

Analysts periodically communicate with high-level managers of the firms whose stock they rate.

Accepted Answer

Analysts often communicate with high-level managers to gather information and insights about the company's performance and future plans. This information can help the analyst make informed decisions about the stock's rating.

Question 2

The ____ is a value-weighted average of stock prices of 30 large U.S. firms.

Accepted Answer

The Dow Jones Industrial Average is a value-weighted average of the stock prices of 30 large U.S. firms.

Question 3

The first-time issuance of shares by a specific firm to the public is referred to as a(n)

Accepted Answer

The first-time issuance of shares by a specific firm to the public is referred to as an initial public offering (IPO). A stock repurchase refers to a company buying back shares from its own shareholders. A secondary stock offering is when a company issues new shares to the public after their initial public offering (IPO). An initial rights issue is when a company offers additional shares to their existing shareholders.

Question 4

____ are employed by brokerage firms and execute orders for clients on the floor of the NYSE.

Accepted Answer

The answer of ____ are employed by brokerage firms and...

Question 5

Buy and sell orders on the OTC market are completed by

Accepted Answer

Buy and sell orders on the OTC market are completed through a telecommunications network. This allows for participants to trade directly with each other without going through an exchange or auction process.

Question 6

An example of shareholder activism is

Accepted Answer

Shareholder activism can take many forms including communication with the firm, engaging in a proxy contest or filing a lawsuit against the board. Therefore, all three options given in the question are valid examples of shareholder activism.

Question 7

The prevailing price per share divided by the firm's earnings per share is known as the

Accepted Answer

The prevailing price per share divided by the firm's earnings per share is known as the price-earnings ratio (P/E ratio).

Question 8

The OTC market does not have a trading floor.

Accepted Answer

Unlike exchanges, the OTC market operates electronically without a physical trading floor. Trading is done through computer networks and over-the-counter trading desks.

Question 9

A(n) ____ is a certificate which represents ownership of a foreign stock.

Accepted Answer

ADR stands for American Depository Receipt, which is a certificate that represents ownership of a foreign stock. ADRs are issued by American banks and represent a specific number of shares in a foreign stock. They are traded on American stock exchanges and allow American investors to invest in foreign companies without going through the hassle of buying and selling foreign currencies or dealing with foreign regulations. The other options, SEAQ, Nasdaq, and AMEX, are all stock exchanges but do not specifically relate to ownership of foreign stocks.

Question 10

Firms listed as "pink sheets" on the OTC market

Accepted Answer

"Pink sheets" refer to companies that do not meet the listing requirements of major stock exchanges such as Nasdaq or NYSE. These companies are often small, thinly-traded, and may not provide sufficient information to investors. As such, they are generally considered to be more risky and speculative investments. Therefore, none of the statements given in the options are true.

Question 11

____ are acquisitions that require substantial amounts of borrowed funds.

Accepted Answer

Leveraged buyouts require large amounts of borrowed funds in order to acquire a company. Stock repurchases, corporate controls, and stock splits do not typically require substantial borrowing.

Question 12

The largest organized exchange, listing the largest firms, is the

Accepted Answer

The New York Stock Exchange is the largest and most well-known organized exchange, and it lists some of the largest and most widely-traded companies in the world.

Question 13

____ are not barriers to corporate control to eliminate agency problems.

Accepted Answer

Leveraged buyouts (LBOs) can be used by corporate control to eliminate agency problems by acquiring a company's outstanding shares with borrowed funds. This reduces the number of shareholders and increases the control of the acquiring company. Antitakeover amendments, poison pills, and golden parachutes are all defensive measures taken by companies to thwart hostile takeovers and are therefore barriers to corporate control.

Question 14

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market.

Accepted Answer

Managers may repurchase stock or initiate a leveraged buyout if they believe the stock is undervalued, as they see it as a good investment. Conversely, they may issue more stock through a secondary offering if they believe it is overvalued, to capitalize on the high valuation.

Question 15

A firm will typically attempt to sell shares from a secondary offering

Accepted Answer

A secondary offering involves the sale of shares that have already been issued by the company (as opposed to an initial public offering, or IPO, where new shares are created and sold for the first time). The price of these shares will generally be set at the prevailing market price, as this is the price that investors are currently willing to pay for the company's stock. Selling the shares far below or above the market price could lead to the company leaving money on the table or having difficulty finding buyers.

Question 16

Which of the following is not true regarding the Sarbanes-Oxley Act?

Accepted Answer

The Sarbanes-Oxley Act prohibits public accounting firms from offering nonaudit consulting services to an audit client unless the client's audit committee pre-approves the nonaudit services. Therefore, choice C is not true. The other three choices are accurate descriptions of the Act.

Question 17

The ____ is a value-weighted index of stock prices of 500 large U.S. firms.

Accepted Answer

The Standard and Poor's 500 (S&P 500) is a value-weighted index of stock prices of 500 large U.S. firms, making it the most accurate gauge of the overall health of the U.S. stock market. The Dow Jones Industrial Average includes only 30 large-cap stocks and is not as diverse in its representation of the market. The New York Stock Exchange Index and Nasdaq are both exchange-specific indices, not representing a broad range of U.S. firms.

Question 18

Shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time.

Accepted Answer

Share price is the easiest and most direct measure of a firm's performance for shareholders because it reflects the market's perception of the company's financial health and future prospects. Changes in share price over time can indicate whether the company is growing, stagnating, or declining, and can provide valuable information for investors making decisions about buying, holding, or selling shares in the company. Employee job descriptions, board of directors, and asset size are all important factors in measuring a firm's performance, but they are more indirect and varied in their meaning and significance to shareholders.

Question 19

A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)

Accepted Answer

A new stock issuance by a specific firm that already has stock outstanding is referred to as a secondary stock offering. A stock repurchase involves the firm buying back its own shares, an initial rights issue involves a company offering its existing shareholders the right to buy additional shares, and an IPO is the first sale of stock to the public by a private company.

Question 20

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price.

Accepted Answer

Sudden favorable news about a firm's performance will increase the demand for the firm's stock, which will increase the price. Investors who believe that the firm's stock is still undervalued will buy more shares, which will increase the price further. Therefore, the sudden favorable news will make investors think that the stock is currently undervalued.

Quiz 10: Stock Offerings and Investor Monitoring