Chap014.pdf

Chapter 14 - An Overview of Corporate Financing

Chapter 14 An Overview of Corporate Financing Multiple Choice Questions

1. Retained earnings are: A. The amount of cash that the firm has saved up B. The difference between the market price of the stock and the book value C. The difference between the net income earned and the dividends paid during a year D. The amount of directly contributed equity capital in excess of par value

2. Internal funds make up more than two-thirds of corporate financing in the following countries: I) The United States II) U.K. III) Germany IV) Japan A. I only B. I and II only C. I, II and III only D. I, II, III and IV

3. Internally generated cash is calculated as: I) Retained earnings II) Interest payments II) Depreciation A. (I - II) B. (I + II) C. (I + III) D. (I - III)

14-1

Chapter 14 - An Overview of Corporate Financing

4. What percentage of corporate financing (non-financial) is made up of internal funds for firms in the U.S.A.? A. 75% (approximately) B. 50% (approximately) C. 25% (approximately) D. none of the above

5. Generally (during the years 1989-2006), non-financial US corporations have financed their capital expenditures mostly through: A. By issuing new equity B. Debt C. Working capital D. Internally generated cash

6. Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because: I) They can avoid the discipline of the financial markets II) The costs of issuing new securities are high III) The announcement of new equity issue is usually bad news for investors A. I only B. II only C. II and III only D. I, II, and III

7. A firm has $100 million in current liabilities, $200 million in total long-term liabilities and $300 million in stockholders' equity, total assets of $600 million. Calculate the long-term debt ratio for the firm. A. 40% B. 20% C. 50% D. None of the above

14-2

Chapter 14 - An Overview of Corporate Financing

8. On the average, firms of the following countries have higher levels of debt ratios (after adjusting for accounting differences) except: A. France B. Netherlands C. Germany D. Italy

9. A firm has $100 million in current liabilities, $200 million in total long-term liabilities and $300 million in stockholders' equity, total assets of $600 million. Calculate the debt ratio for the firm. A. 40% B. 20% C. 50% D. None of the above

10. On the average, firms (manufacturing industry) of the following countries have lower levels of debt ratio (after adjusting for accounting differences) except: A. Japan B. Netherlands C. Finland D. Italy

11. Total capitalization is defined as: A. Total long-term liabilities plus stockholders' equity B. Total debt plus stockholders' equity C. Total debt minus stockholders' equity D. Current liabilities and stockholders' equity

12. On the average, firms (manufacturing sector) of the following countries have about average levels of debt ratio (after adjusting for accounting differences) except: A. USA B. Austria C. Spain D. Germany

14-3

Chapter 14 - An Overview of Corporate Financing

13. Maximum number of shares that can be issued by a firm is called A. Treasury stock B. Outstanding shares C. Authorized shares D. None of the above

14. Generally, the book value of the shareholders' equity is represented by: A. The total assets minus the current liabilities B. The total assets minus the net worth C. The sum of preferred stock, debt and the capital surplus D. The sum of the par value of common stock, the capital surplus and the accumulated retained earnings

15. Capital surplus usually refers to: A. The stock's par value B. The accumulated retained earnings during the life of the corporation C. The amount of stock repurchased D. The amount of directly contributed equity capital in excess of par value

16. The market value of equity is calculated as: A. (Market price) × (# of shares outstanding) B. (Market price) × (# of treasury shares) C. (Market price) × (# of authorized shares) D. (Par value) × (# of shares outstanding)

17. Shares of stock that have been repurchased by the corporation are called A. Authorized shares B. Repurchase agreements C. Treasury stock D. Retained equity

14-4

Chapter 14 - An Overview of Corporate Financing

18. Shares held by the investors are known as: A. issued but not outstanding B. issued and outstanding C. authorized shares D. none of the above

19. The maximum number of shares a firm can issue is known as: A. issued but not outstanding B. issued and outstanding C. authorized shares D. none of the above

20. The equity accounts of Bio-Tech Company is as follows:

Suppose the firm sells 2,000,000 new (additional) shares at a price of $20 per share. What is the new value of Common Shares account? A. 12,000,000 B. 10,000,000 C. 2,000,000 D. None of the above

14-5

Chapter 14 - An Overview of Corporate Financing

21. The equity accounts of Bio-Tech Company is as follows:

Suppose that the firm sells 2,000,000 new shares at a price of $20/share. What is the new value of the additional paid-in-capital account? A. $144,000,000 B. $40,000,000 C. $88,000,000 D. $70,000,000

22. Bio-Tech Company has had a very successful year and earnings are $21million. The company has 12 million shares outstanding and will pay a dividend of $1.00/share. The old value of retained earnings account is 125 million. What is the retained earnings for the year and the new value of retained earnings account? A. $21 million & $146 million B. $9 million & $134 million C. $12 million & $137 million D. None of the above

23. In the United Sates, who holds the largest portion of corporate equities? A. Households B. Institutional investors C. Foreign entities D. None of the above

24. If you own 1,000 shares of stock and you can cast 5,000 votes for a particular director, then the stock features: A. Cumulative voting B. Straight voting C. Majority voting D. None of the above

14-6

Chapter 14 - An Overview of Corporate Financing

25. Minority shareholders can also be represented on the board of directors under: A. Majority voting B. Cumulative voting C. Straight voting D. None of the above

26. 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. None of the above

27. 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. None of the above

28. A corporation has 1,000,000 shares outstanding and 10 directors are up for election. If the stock features cumulative voting, approximately how many shares do you have to muster in order to guarantee yourself a place on the board of directors? (Ignore possible ties) A. 500,000 B. 200,000 C. 100,000 D. None of the above

14-7

Chapter 14 - An Overview of Corporate Financing

29. The premium paid by investors to gain voting control, among the countries mentioned, is the highest in: A. U.S.A. B. Mexico C. Italy D. None of the above

30. A modification to the company charter that requires 75% shareholder approval for a merger is called a(n): A. Majority voting amendment B. Cumulative voting amendment C. Proxy voting amendment D. Supermajority amendment

31. The rare event where a firm's existing directors and management compete with outsiders for the effective control of the corporation is called: A. majority voting B. supermajority amendment C. proxy contest D. none of the above

32. Different classes of stocks are usually issued to: I) Maintain ownership control by holding the class of stock with greater voting rights II) Pay less in dividends between the classes of stock III) To extract prerequisites without the other class of stockholders knowing A. I only B. II only C. III only D. II and III only

14-8

Chapter 14 - An Overview of Corporate Financing

33. A grant of authority allowing someone else to vote shares of stock that you own is called a: I) Power of share authorization II) Proxy voting III) Restricted conveyance A. I only B. II only C. III only D. I and III only

34. If a group of outsiders solicits the authority to vote shares to replace existing management, then it is called a: A. Tender offer B. Proxy contest C. Vote of confidence D. None of the above

35. In the case of Google, which has issued Class A and Class B shares: I) both classes of shares have the same cash flow rights II) both classes of shares have the same control rights III) both classes of shares have different cash flow rights IV) both classes of shares have different control rights A. I and II only B. II and III only C. I and IV only D. none of the above

36. In the United States the premium that an investor needed to pay to gain voting control is: A. 29% B. 36% C. 2% D. none of the above

14-9

Chapter 14 - An Overview of Corporate Financing

37. Exploitation of minority shareholders by the majority shareholders is called: A. reverse stock split B. tunneling C. exploitation D. none of the above

38. Stockholders usually have the following rights: A. To elect board members, authorize issue of new shares and vote on matters of great importance like mergers B. To share proportionally in regular and liquidating dividends C. To share proportionally in any new stock sold D. All of the above

39. Which of the following statements about partnership and limited liability is(are) true? I) all the partners in a partnership can have limited liability II) general partners in a partnership cannot have limited liability III) general partners in a partnership can be corporations IV) only limited partners in a partnership can have limited liability A. I and II only B. I, II and III only C. II, III and IV only D. I and III only

40. The following are characteristics of preferred stock except: I) pays fixed dividends II) has cumulative feature III) has voting rights A. I only B. I and II only C. III only D. II only

14-10

Chapter 14 - An Overview of Corporate Financing

41. Preference in position among creditors when it comes to repayment is called: A. Seniority B. Security C. Liquidation preference D. Absolute priority

42. Debt that may be extinguished before maturity is referred to as: A. Sinking-fund B. Debentures C. Unfunded debt D. Callable debt

43. If a debenture 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 the senior creditors in the event of default D. Is secondary to equity

44. US dollars deposited in a German bank are called: A. Deutsche dollars B. American depositing receipts C. Eurodollars D. None of the above

45. When an entire security issue is directly sold to qualified institutional investors, such an issue is called a: A. Public issue B. Private placement C. Securitization D. Commercial paper

14-11

Chapter 14 - An Overview of Corporate Financing

46. Which of the following instruments gives the owner the right to purchase securities directly from the firm at a fixed price during a specified period of time? A. Warrant B. Call option C. American option D. European option

47. 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

48. When new securities are sold by a firm, it is called A. Primary market transaction B. Secondary market transaction C. O-T-C market transaction D. None of the above

49. The following are debt in disguise except: A. accounts payable B. lease C. unfounded obligations D. all of the above are debt in disguise

50. The following are the main characteristics of financial intermediaries except: I) they may raise money in special ways II) they invest in financial assets III) they mainly invest in real assets A. I only B. I and II only C. II only D. III only

14-12

Chapter 14 - An Overview of Corporate Financing

51. The following functions are provided by financial intermediaries for the smooth functioning of the economy: I) The payment mechanism II) Borrowing and lending III) Pooling risk A. I only B. I and II only C. I, II, and III D. III only

52. Which of the following investments allows investors to own assets indirectly via shares that are part of a pool of other investors? I) RIET II) Trust III) Option A. I only B. I and II only C. I, II, and III D. III only

53. Which type of voting allows minority shareholders to allocate their votes in a manner to increase the chance of electing a director? A. Majority voting B. Cumulative voting C. Representative voting D. Executive voting

True / False Questions

54. The maximum number of shares that can be used is known as the authorized share capital. True False

14-13

Chapter 14 - An Overview of Corporate Financing

55. Debt due after one year or more is called long-term debt. True False

56. A firm cannot finance a long-term project using short-term debt. True False

57. A floating-rate loan is the opposite of a sinking fund. True False

58. The single European currency established by European union is called "Euro." True False

59. Dollars deposited in the USA by Europeans are called Eurodollars. True False

60. LIBOR stands for London Interbank Offered Rate. True False

61. A warrant is nothing but an option. True False

62. Financial intermediaries provide the following important functions for the economy ¾ the payment mechanism, borrowing and lending, and pooling risk. True False

14-14

Chapter 14 - An Overview of Corporate Financing

63. Shareholders have more influence over who sits on the board of directors than the firm CEO. True False

64. Dual class shares are often created to give one group of owners more power over the company than another.

True False

Essay Questions

65. Why do firms rely heavily on internal funds?

66. Indicate important sources of finance available to corporations.

67. Briefly explain the voting rights of the shareholders.

14-15

Chapter 14 - An Overview of Corporate Financing

68. Briefly explain different types of voting used for the election of the board of directors.

69. Briefly discuss some of the features that would increase the value of a corporate bond?

70. Briefly explain different types of financial markets.

71. Briefly explain various functions of financial institutions.

14-16

Chapter 14 - An Overview of Corporate Financing

72. Explain how shareholders might have lost control over the firm, relative to managers, over the years.

14-17

Chapter 14 - An Overview of Corporate Financing

Chapter 14 An Overview of Corporate Financing Answer Key

Multiple Choice Questions

1. Retained earnings are: A. The amount of cash that the firm has saved up B. The difference between the market price of the stock and the book value C. The difference between the net income earned and the dividends paid during a year D. The amount of directly contributed equity capital in excess of par value

Type: Easy

2. Internal funds make up more than two-thirds of corporate financing in the following countries: I) The United States II) U.K. III) Germany IV) Japan A. I only B. I and II only C. I, II and III only D. I, II, III and IV

Type: Easy

14-18

Chapter 14 - An Overview of Corporate Financing

3. Internally generated cash is calculated as: I) Retained earnings II) Interest payments II) Depreciation A. (I - II) B. (I + II) C. (I + III) D. (I - III)

Type: Easy

4. What percentage of corporate financing (non-financial) is made up of internal funds for firms in the U.S.A.? A. 75% (approximately) B. 50% (approximately) C. 25% (approximately) D. none of the above

Type: Easy

5. Generally (during the years 1989-2006), non-financial US corporations have financed their capital expenditures mostly through: A. By issuing new equity B. Debt C. Working capital D. Internally generated cash

Type: Easy

14-19

Chapter 14 - An Overview of Corporate Financing

6. Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because: I) They can avoid the discipline of the financial markets II) The costs of issuing new securities are high III) The announcement of new equity issue is usually bad news for investors A. I only B. II only C. II and III only D. I, II, and III

Type: Easy

7. A firm has $100 million in current liabilities, $200 million in total long-term liabilities and $300 million in stockholders' equity, total assets of $600 million. Calculate the long-term debt ratio for the firm. A. 40% B. 20% C. 50% D. None of the above Long-Term Debt ratio = (200)/500 = 0.4 or 40%

Type: Easy

8. On the average, firms of the following countries have higher levels of debt ratios (after adjusting for accounting differences) except: A. France B. Netherlands C. Germany D. Italy

Type: Easy

14-20

Chapter 14 - An Overview of Corporate Financing

9. A firm has $100 million in current liabilities, $200 million in total long-term liabilities and $300 million in stockholders' equity, total assets of $600 million. Calculate the debt ratio for the firm. A. 40% B. 20% C. 50% D. None of the above Debt ratio = (100 + 200 )/600 = 0.5 or 50%

Type: Easy

10. On the average, firms (manufacturing industry) of the following countries have lower levels of debt ratio (after adjusting for accounting differences) except: A. Japan B. Netherlands C. Finland D. Italy

Type: Easy

11. Total capitalization is defined as: A. Total long-term liabilities plus stockholders' equity B. Total debt plus stockholders' equity C. Total debt minus stockholders' equity D. Current liabilities and stockholders' equity

Type: Easy

14-21

Chapter 14 - An Overview of Corporate Financing

12. On the average, firms (manufacturing sector) of the following countries have about average levels of debt ratio (after adjusting for accounting differences) except: A. USA B. Austria C. Spain D. Germany

Type: Easy

13. Maximum number of shares that can be issued by a firm is called A. Treasury stock B. Outstanding shares C. Authorized shares D. None of the above

Type: Easy

14. Generally, the book value of the shareholders' equity is represented by: A. The total assets minus the current liabilities B. The total assets minus the net worth C. The sum of preferred stock, debt and the capital surplus D. The sum of the par value of common stock, the capital surplus and the accumulated retained earnings

Type: Easy

15. Capital surplus usually refers to: A. The stock's par value B. The accumulated retained earnings during the life of the corporation C. The amount of stock repurchased D. The amount of directly contributed equity capital in excess of par value

Type: Easy

14-22

Chapter 14 - An Overview of Corporate Financing

16. The market value of equity is calculated as: A. (Market price) × (# of shares outstanding) B. (Market price) × (# of treasury shares) C. (Market price) × (# of authorized shares) D. (Par value) × (# of shares outstanding)

Type: Easy

17. Shares of stock that have been repurchased by the corporation are called A. Authorized shares B. Repurchase agreements C. Treasury stock D. Retained equity

Type: Easy

18. Shares held by the investors are known as: A. issued but not outstanding B. issued and outstanding C. authorized shares D. none of the above

Type: Easy

19. The maximum number of shares a firm can issue is known as: A. issued but not outstanding B. issued and outstanding C. authorized shares D. none of the above

Type: Easy

14-23

Chapter 14 - An Overview of Corporate Financing

20. The equity accounts of Bio-Tech Company is as follows:

Suppose the firm sells 2,000,000 new (additional) shares at a price of $20 per share. What is the new value of Common Shares account? A. 12,000,000 B. 10,000,000 C. 2,000,000 D. None of the above Common Shares = 10,000,000 + 2,000,000 = 12,000,000

Type: Medium

21. The equity accounts of Bio-Tech Company is as follows:

Suppose that the firm sells 2,000,000 new shares at a price of $20/share. What is the new value of the additional paid-in-capital account? A. $144,000,000 B. $40,000,000 C. $88,000,000 D. $70,000,000 Additional paid-in-capital = (2,000,000)(19) = 38,000,000; new additional paid-in-capital account = 50,000,000 + 38,000,000 = 88,000,000

Type: Medium

14-24

Chapter 14 - An Overview of Corporate Financing

22. Bio-Tech Company has had a very successful year and earnings are $21million. The company has 12 million shares outstanding and will pay a dividend of $1.00/share. The old value of retained earnings account is 125 million. What is the retained earnings for the year and the new value of retained earnings account? A. $21 million & $146 million B. $9 million & $134 million C. $12 million & $137 million D. None of the above RE = 21 - 12 = 9 million; new value of RE account = 125 + 9 = 134 million

Type: Medium

23. In the United Sates, who holds the largest portion of corporate equities? A. Households B. Institutional investors C. Foreign entities D. None of the above

Type: Easy

24. If you own 1,000 shares of stock and you can cast 5,000 votes for a particular director, then the stock features: A. Cumulative voting B. Straight voting C. Majority voting D. None of the above

Type: Easy

14-25

Chapter 14 - An Overview of Corporate Financing

25. Minority shareholders can also be represented on the board of directors under: A. Majority voting B. Cumulative voting C. Straight voting D. None of the above

Type: Easy

26. 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. None of the above Total number of votes = 5 × 1000 = 5000

Type: Easy

27. 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. None of the above

Type: Easy

14-26

Chapter 14 - An Overview of Corporate Financing

28. A corporation has 1,000,000 shares outstanding and 10 directors are up for election. If the stock features cumulative voting, approximately how many shares do you have to muster in order to guarantee yourself a place on the board of directors? (Ignore possible ties) A. 500,000 B. 200,000 C. 100,000 D. None of the above # of shares = 1,000,000/10 = 100,000

Type: Medium

29. The premium paid by investors to gain voting control, among the countries mentioned, is the highest in: A. U.S.A. B. Mexico C. Italy D. None of the above

Type: Medium

30. A modification to the company charter that requires 75% shareholder approval for a merger is called a(n): A. Majority voting amendment B. Cumulative voting amendment C. Proxy voting amendment D. Supermajority amendment

Type: Easy

14-27

Chapter 14 - An Overview of Corporate Financing

31. The rare event where a firm's existing directors and management compete with outsiders for the effective control of the corporation is called: A. majority voting B. supermajority amendment C. proxy contest D. none of the above

Type: Easy

32. Different classes of stocks are usually issued to: I) Maintain ownership control by holding the class of stock with greater voting rights II) Pay less in dividends between the classes of stock III) To extract prerequisites without the other class of stockholders knowing A. I only B. II only C. III only D. II and III only

Type: Easy

33. A grant of authority allowing someone else to vote shares of stock that you own is called a: I) Power of share authorization II) Proxy voting III) Restricted conveyance A. I only B. II only C. III only D. I and III only

Type: Easy

14-28

Chapter 14 - An Overview of Corporate Financing

34. If a group of outsiders solicits the authority to vote shares to replace existing management, then it is called a: A. Tender offer B. Proxy contest C. Vote of confidence D. None of the above

Type: Easy

35. In the case of Google, which has issued Class A and Class B shares: I) both classes of shares have the same cash flow rights II) both classes of shares have the same control rights III) both classes of shares have different cash flow rights IV) both classes of shares have different control rights A. I and II only B. II and III only C. I and IV only D. none of the above

Type: Easy

36. In the United States the premium that an investor needed to pay to gain voting control is: A. 29% B. 36% C. 2% D. none of the above

Type: Medium

37. Exploitation of minority shareholders by the majority shareholders is called: A. reverse stock split B. tunneling C. exploitation D. none of the above

Type: Easy

14-29

Chapter 14 - An Overview of Corporate Financing

38. Stockholders usually have the following rights: A. To elect board members, authorize issue of new shares and vote on matters of great importance like mergers B. To share proportionally in regular and liquidating dividends C. To share proportionally in any new stock sold D. All of the above

Type: Easy

39. Which of the following statements about partnership and limited liability is(are) true? I) all the partners in a partnership can have limited liability II) general partners in a partnership cannot have limited liability III) general partners in a partnership can be corporations IV) only limited partners in a partnership can have limited liability A. I and II only B. I, II and III only C. II, III and IV only D. I and III only

Type: Medium

40. The following are characteristics of preferred stock except: I) pays fixed dividends II) has cumulative feature III) has voting rights A. I only B. I and II only C. III only D. II only

Type: Easy

14-30

Chapter 14 - An Overview of Corporate Financing

41. Preference in position among creditors when it comes to repayment is called: A. Seniority B. Security C. Liquidation preference D. Absolute priority

Type: Easy

42. Debt that may be extinguished before maturity is referred to as: A. Sinking-fund B. Debentures C. Unfunded debt D. Callable debt

Type: Easy

43. If a debenture 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 the senior creditors in the event of default D. Is secondary to equity

Type: Medium

44. US dollars deposited in a German bank are called: A. Deutsche dollars B. American depositing receipts C. Eurodollars D. None of the above

Type: Easy

14-31

Chapter 14 - An Overview of Corporate Financing

45. When an entire security issue is directly sold to qualified institutional investors, such an issue is called a: A. Public issue B. Private placement C. Securitization D. Commercial paper

Type: Easy

46. Which of the following instruments gives the owner the right to purchase securities directly from the firm at a fixed price during a specified period of time? A. Warrant B. Call option C. American option D. European option

Type: Easy

47. 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

Type: Easy

48. When new securities are sold by a firm, it is called A. Primary market transaction B. Secondary market transaction C. O-T-C market transaction D. None of the above

Type: Easy

14-32

Chapter 14 - An Overview of Corporate Financing

49. The following are debt in disguise except: A. accounts payable B. lease C. unfounded obligations D. all of the above are debt in disguise

Type: Medium

50. The following are the main characteristics of financial intermediaries except: I) they may raise money in special ways II) they invest in financial assets III) they mainly invest in real assets A. I only B. I and II only C. II only D. III only

Type: Medium

51. The following functions are provided by financial intermediaries for the smooth functioning of the economy: I) The payment mechanism II) Borrowing and lending III) Pooling risk A. I only B. I and II only C. I, II, and III D. III only

Type: Medium

14-33

Chapter 14 - An Overview of Corporate Financing

52. Which of the following investments allows investors to own assets indirectly via shares that are part of a pool of other investors? I) RIET II) Trust III) Option A. I only B. I and II only C. I, II, and III D. III only

Type: Difficult

53. Which type of voting allows minority shareholders to allocate their votes in a manner to increase the chance of electing a director? A. Majority voting B. Cumulative voting C. Representative voting D. Executive voting

Type: Medium

True / False Questions

54. The maximum number of shares that can be used is known as the authorized share capital. TRUE

Type: Easy

55. Debt due after one year or more is called long-term debt. TRUE

Type: Easy

14-34

Chapter 14 - An Overview of Corporate Financing

56. A firm cannot finance a long-term project using short-term debt. FALSE

Type: Medium

57. A floating-rate loan is the opposite of a sinking fund. FALSE

Type: Easy

58. The single European currency established by European union is called "Euro." TRUE

Type: Easy

59. Dollars deposited in the USA by Europeans are called Eurodollars. FALSE

Type: Easy

60. LIBOR stands for London Interbank Offered Rate. TRUE

Type: Easy

61. A warrant is nothing but an option. TRUE

Type: Medium

14-35

Chapter 14 - An Overview of Corporate Financing

62. Financial intermediaries provide the following important functions for the economy ¾ the payment mechanism, borrowing and lending, and pooling risk. TRUE

Type: Medium

63. Shareholders have more influence over who sits on the board of directors than the firm CEO. FALSE

Type: Medium

64. Dual class shares are often created to give one group of owners more power over the company than another.

TRUE

Type: Medium

Essay Questions

65. Why do firms rely heavily on internal funds? Internal funds, defined as depreciation plus retained earnings, make up a large portion of finds invested by U.S. corporations each year. The main reason is the cost of issuing new equity. The cost of issuing new equity is quite high and the corporations might be trying to minimize these costs. The second reason might be to avoid the discipline of the security market.

Type: Medium

14-36

Chapter 14 - An Overview of Corporate Financing

66. Indicate important sources of finance available to corporations. Different sources of finance available to corporations are: • Common stock • Preferred stock • Debt

Type: Medium

67. Briefly explain the voting rights of the shareholders. The common stockholders have a right to vote, either in person or by proxy, on the appointments to the board of directors. Important decisions like mergers must be submitted for shareholder approval. Different classes of common stocks can have different voting rights.

Type: Easy

68. Briefly explain different types of voting used for the election of the board of directors. There are two different types of voting that are used for electing the board of directors, depending on which one is specified in the articles of incorporation. According to majority voting system, each director is voted upon separately and the stockholders can cast one vote per share that they own. According to cumulative voting, the directors are voted upon jointly and stockholders can, if they want to, cast all their votes to just one candidate. Cumulative voting makes it easier for a minority group of shareholders to elect directors.

Type: Easy

14-37

Chapter 14 - An Overview of Corporate Financing

69. Briefly discuss some of the features that would increase the value of a corporate bond? There several important features that would increase the value of a corporate bond. The most important ones are: convertible provision and collateral associated with the bond. Convertible feature allows the bondholder to exchange the bond for a predetermined number of shares. The firm may also set aside some of its assets specifically for the protection of particular bondholders. It is called collateral and the bonds are called secured bonds. These features increase the value of bonds.

Type: Medium

70. Briefly explain different types of financial markets. Financial markets can be classified as "primary market" and " secondary market." When corporations sell securities for the first time, it is called a primary market transaction. When already issued securities are traded such transactions are called secondary market transactions. Financial markets can also be classified as organized exchanges and over-the-counter (OTC) markets.

Type: Medium

71. Briefly explain various functions of financial institutions. Financial institutions provide several services that contribute to the smooth functioning of the economy. The most important ones are as follows: • The payment mechanism • Borrowing and lending • Pooling risk

Type: Medium

14-38

Chapter 14 - An Overview of Corporate Financing

72. Explain how shareholders might have lost control over the firm, relative to managers, over the years. There are many possible answers to this question. The most relevant answer is a simple disparity of resources. Managers have access to the resources of the firm and may use those resources to enact changes in corporate governance rules or laws to which they benefit. Other than large institutional shareholders, most common stockholders have very little financial incentive to lobby their interests considering the small size of their investment, compared to the overall size of the firm. This is why most shareholder rights initiatives are led by institutional investors or large individual investors.

Type: Difficult

14-39