Strayer FIN540 Week 5 Midterm Exam
TRUE/FALSE
1. If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
a. True
b. False
2. Going public establishes a market value for the firm’s stock, and it also ensures that a liquid market will continue to exist for the firm’s shares. This is especially true for small firms that are not widely followed by security analysts.
a. True
b. False
3. The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.
a. True
b. False
4. The term “leaving money on the table” refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm’s new stock offering. The banker is, in effect, “buying the job” with the low bid and thus not getting all the money his firm would normally earn on the job.
a. True
b. False
5. Whereas commercial banks take deposits from some customers and make loans to other customers, the principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters. However, financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks. This was not true some years ago, when the two types of banks were required by law to be completely independent of one another.
a. True
b. False
6. The term “equity carve-out” refers to the situation where a firm’s managers give themselves the right to purchase new stock at a price far below the going market price. Since this dilutes the value of the public stockholders, it “carves out” some of their value.
a. True
b. False
7. Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted. Since then long-term rates (10 years or longer) have remained constant, but the yield curve has resumed its normal upward slope. Under such conditions, a bond refunding would almost certainly be profitable.
a. True
b. False
8. The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk of not realizing the interest savings.
a. True
b. False
9. If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision, and if the NPV of refunding is positive, then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.
a. True
b. False
10. When a firm refunds a debt issue, the firm’s stockholders gain and its bondholders lose. This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.
a. True
b. False
MULTIPLE CHOICE
11. Which of the following is generally NOT true and an advantage of going public?
a. Increases the liquidity of the firm’s stock.
b. Makes it easier to obtain new equity capital.
c. Establishes a market value for the firm.
d. Makes it easier for owner-managers to engage in profitable self-dealings.
e. Facilitates stockholder diversification.
12. Which of the following statements about listing on a stock exchange is most CORRECT?
a. Any firm can be listed on the NYSE as long as it pays the listing fee.
b. Listing provides a company with some “free” advertising, and it may enhance the firm’s prestige and help it do more business.
c. Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.
d. The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.
e. Listing is a decision of more significance to a firm than going public.
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