ECO 389 Problem Set 12

ECO 389 Problem Set 12

Problem 1
Recently, which of the following sources of funds has played the greatest role in the financing of U.S. nonfinancial firms?

A. internal funds
B. net equity issues
C. net borrowing
D. All of the sources were approximately the same

Problem 2
A firm has $100 million in current liabilities, $200 million in total long-term liabilities, $300 million in stockholders’ equity, and total assets of $600 million. Calculate the debt ratio for the firm.

A. 40%
B. 20%
C. 50%
D. 33%

Problem 3
Which of the following is NOT a sensible reason for a firm to rely on internal funds?

A. Equity issues are generally expensive.
B. A new bond issue may drive the firm’s debt ratio too high.
C. Financial markets interpret the issuance of equity unfavorably.
D. All of these are sensible reasons to rely on internal funds.

Problem 4
Consider the aggregate balance sheet for manufacturing corporations in the U.S. Which of the following sources of financing plays the smallest role?

A. Current liabilities
B. Long-term debt
C. Stockholders’ equity
D. Each of the sources plays an equal role.

Problem 5
As a provider of funds to a corporation, owning which of the following corporate securities will give you the most control rights?

A. Short-term bank loan
B. Long-term bond
C. Preferred stock
D. Common stock

Problem 6
Typically, the book value of shareholders’ equity equals:

A. Total assets minus current liabilities.
B. Total assets minus net worth.
C. The sum of preferred stock, debt, and the par value of equity.
D. The sum of the par value of common stock, additional paid-in capital, and accumulated retained earnings.

Problem 7
As a provider of funds to a corporation, owning which of the following corporate securities will generally give you the strongest rights to cash flow?

A. short-term bank loan
B. long-term bond
C. preferred stock
D. common stock

Problem 8
The market value of equity equals:

A. (Market price) × (# of shares outstanding)
B. (Market price) × (# of treasury shares)
C. (Market price) × (# of authorized shares)
D. (Par value) × (# of shares outstanding)

Problem 9
Shares held by investors are known as:

A. issued but not outstanding
B. issued and outstanding
C. authorized shares
D. treasury stock

Problem 10
In the United Sates, who holds the smallest portion of corporate equities?

A. Households
B. Pension funds
C. Mutual funds
D. Insurance companies

Problem 11
If you own 1,000 shares of common stock of a firm and there are five directors being elected, what is the maximum number of votes you can cast for a particular director under cumulative voting?

A. 5,000
B. 1,000
C. 200
D. 5

Problem 12
If you own 1,000 shares of common stock of a firm and there are five directors being elected, what is the maximum number of votes you can cast for a particular director under majority voting?

A. 5,000
B. 1,000
C. 200
D. 5

Problem 13
A modification to the company charter that requires 75% shareholder approval for a merger is called a:

A. Majority voting amendment.
B. Cumulative voting amendment.
C. Proxy voting amendment.
D. Supermajority amendment.

Problem 14
In the United States the premium that an investor needed to pay to gain voting control is:

A. 29%.
B. 36%.
C. 2%.
D. 32%.

Problem 15
Exploitation of minority shareholders by majority shareholders is called:

A. A reverse stock split.
B. Tunneling.
C. Financial engineering.
D. Proxy fighting.

Problem 16
Preference in position among creditors when it comes to repayment is called:

A. Seniority.
B. Securitization.
C. Time preference.
D. Absolute return.

Problem 17
Suppose a firm sets aside assets to protect particular investors. These assets are called:

A. Repurchased shares.
B. Senior debt.
C. Subordinated debt.
D. Collateral.

Problem 18
If a bond is junior or subordinated, it:

A. Has a higher priority status than specified creditors.
B. Has been issued because the company is in default.
C. Must give preference to senior creditors in the event of default.
D. Is secondary to equity.

Problem 19
A corporate bond that can be exchanged for a fixed number of shares of stock is called a:

A. Callable bond.
B. Debenture.
C. Convertible bond.
D. Warrant.

Problem 20
When new securities are sold by a firm, it is termed a:

A. Primary market transaction.
B. Secondary market transaction.
C. OTC market transaction.
D. Open market operations.

Here’s the SOLUTION

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