University of San Carlos - Main Campus ACCTG 509 Chapter 8 True/False Questions 1)The lead bank in the syndicate that negotiates with the issuing company on behalf of the syndicate is called the originating house

University of San Carlos - Main Campus

ACCTG 509

Chapter 8

True/False Questions

1)The lead bank in the syndicate that negotiates with the issuing company on behalf of the syndicate is called the originating house.

2. An order to buy shares of stock at a specified price or better is called a market order.  

3. The NYSE defines the simultaneous buying and selling of 15 or more different stocks with a total value of at least $1 million dollars to be block trading and such trades are subject to trading curbs.

4. A long term investor in a high marginal tax bracket will normally prefer a dollar of capital gain to a dollar of dividend yield.

5. In the event of bankruptcy a firm's janitor must be paid all the salary owed him before stockholders receive anything.

6. At year end a firm has assets of $100 and debts due of $120. The stockholders must pay an additional

$20 out of their own pocket.

7. In cumulative voting, a stockholder who owns 51% of the shares can be assured of the ability to elect the entire board of directors.

8. In straight voting, a stockholder who owns 51% of the shares can elect the entire board of directors.  

9. Preferred stockholders have a claim senior to common stock but junior to bondholders.

10. A market order is normally executed in 15 minutes or less but the buyer has three days to actually pay for the stock.

11. Preferred stock is generally a costlier source of funds than bonds.

12. The smallest stock price change is currently 1/16th.

13. Firms with both common and preferred stock are called dual class firms.

14. If the stock markets are weak form efficient, stock prices reflect all historic public information about a firm.

15. IPOs are sometimes sold via a rights offering.

Multiple Choice Questions

16. You buy a stock for $14 per share and sell it for $18 after you collect a $1.00 per share dividend. Your pre-tax capital gain yield is            and your pre-tax dividend yield is                    .

A) 28.57% ; 7.14%

B) 35.71% ; 0.00%

C) 21.42% ; 5.55%

D) 22.22% ; 5.55%

E) 27.78% ; 6.32%

17. Common stocks typically have which of the following that bonds do not have:
    1. Voting rights
    2. Fixed cash flows
    3. Set maturity date
    4. Tax deductibility of cash flows

1. I only
2. I, II and IV only
3. II, III and IV only
4. IV only
5. I, II, III and IV

18. You buy a stock for $10 per share and sell it for $12 after holding it for slightly over a year and collecting a $0.50 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is                   .

A) 18.1%

B) 19.6%

C) 25.0%

D) 20.2%

E) 17.4%

19. An investor has a 38% ordinary income tax rate and a 20% long term capital gains tax rate. The investor holds stock in a firm that could pay its usual $1 per share dividend or reinvest the cash in the firm. The stock price is currently $25 per share. If the firm does not pay the dividend the share price will rise. If it pays the dividend the share price will stay the same. By how much must the share price rise if the dividend is not paid in order to make the investor indifferent between receiving the dividend or not?

A) $2.00

B) $0.59

C) $1.55

D) $1.97

E) $2.50

20. With                           voting, all directors up for election are voted on by the shareholders at the same time in one general election.

1. Straight
2. Participating
3. Nonparticipating
4. Proxy
5. Cumulative

21. If all preferred dividend payments that have been missed must be paid before any common stock dividend can be paid the preferred stock is called           preferred stock.

1. Cumulative
2. Participating
3. Nonparticipating
4. Voting
5. Dual class

22. In the year 2000 about 20% of the shares of the top one hundred non-U.S. companies (ranked by sales) were owned by U.S. residents. Most of these stocks were held in the form of                                                                                                                                                                                              .

1. Foreign direct investment
2. ADRs
3. Proxies
4. GRDs
5. Brady bonds

23. If the net proceeds are greater than the gross proceeds in an underwritten offering

1. The investment banker made a profit on the spread
2. The issuing company underpriced its securities
3. The issue fails to occur
4. The SEC rescinds the issue
5. None of the above

24. The preemptive right is designed to

1. Allow management to diffuse stock ownership any voting power
2. Allow managers to preempt a stock offering if they do not like the terms of the deal
3. Allow existing shareholders the right to sell their existing shares before the new offer
4. Allow existing shareholders to buy shares of the new offering if they desire
5. None of the above

25. The NASDAQ automatic order execution system for individual traders placing buy or sell orders of 1000 or fewer shares is called the

1. ECN Network
2. SOE System
3. NASDAQ/AMEX Joint Program
4. Instinet Network
5. E*Trade Online Program

26. The preliminary version of a security offer that is circulated to potential buyers before SEC approval (registration) is obtained is called a

1. Final prospectus
2. Shelf registration statement
3. Due diligence draft
4. Waiting period offer
5. Red herring prospectus

27. A shelf registration allows firms the opportunity to avoid the normal                         day waiting period by allowing preregistration of securities for up to                                  years.

1. 20 day; 2 years
2. 10 day; 1 year
3. 15 day; 3 years
4. 20 day; 1 year
5. 30 day; 2 year

28. Which of the following is/are true about specialists?
    1. Investment banks generally cannot be specialists
    2. Specialists are used by the NASDAQ system
    3. Market and limit orders are transacted at specialist posts, but the specialist's 'own account' orders are executed elsewhere
    4. Specialists help maintain continuous trading

1. I, II and III only
2. I and IV only
3. II, III and IV only
4. I only
5. III only

29. Market orders are generally executed in less than                    and settled in                .

1. 15 minutes; 3 days
2. 1 hour; 1 week
3. 30 minutes; 2 days
4. 30 minutes; 3 days
5. 45 minutes; 4 days

30. A stock has a P/E ratio of 95. If earnings don't grow the investor must wait how long to recover their investment?

1. 20 years
2. 45 years
3. 60 years
4. 95 years
5. None of the above

31. In terms of volume of trading and market value of firms traded the                               is the largest U.S. stock market. In terms of number of firms traded the               is the largest in the U.S.

1. NYSE ; NYSE
2. NASDAQ ; NYSE
3. NYSE ; AMEX
4. NYSE ; NASDAQ
5. NASDAQ ; AMEX

32. On the NASDAQ system, the inside quotes are the

1. Lowest ask and lowest bid
2. Lowest bid and highest ask
3. Highest bid and highest ask
4. Highest bid and lowest ask
5. None of the above

33. NYSE listing has traditionally benefited a firm by

1. Improving the stock's price
2. Generating increased publicity for the firm
3. Providing easier access to primary market capital
4. B and C only
5. A, B and C

34. Which of the following indices are value weighted?
    1. NYSE Composite
    2. S&P500
    3. NASDAQ Composite
    4. Dow Jones Industrial Average

1. I, II, III and IV
2. I only
3. II only
4. II, III and IV only
5. I, II and III only

35. The largest holder of common stock ($) is

1. Pension funds
2. Households
3. Mutual funds
4. Brokers and dealers
5. Life insurance firms