EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 1, Problem 5PS
Summary Introduction
To state: If corporate
Introduction:
Primary market: Is considered as the market securities are issued for the first time. The companies sell new shares or stocks, bonds for the first time to the public. This happens when it calls for an initial public offering(IPO).
The secondary market already issued securities are traded by investors. Trading of securities normally happens in stock markets.
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Students have asked these similar questions
The company cost of capital
depends on current profits and
cashflows, which measures what
investors require from the company:
A) True
B) False
Corporate debt can be dependable
or risky, which depends on the value
and the risk of the firm's assets.
Bondholders can take steps to
eliminate default risk:
A) true
B) False
Financial risk refers to the:
Multiple Choice
possibility that interest rates will increase.
risk of owning equity securities.
the risk that the share price may not reflect all known information
general business risk of the firm.
risk faced by equity holders of firms with debt.
Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?
a. Compensating managers with stock options.
b. Abolishing the Security and Exchange Commission.
c. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.
d. Financing risky projects with additional debt.
e. The threat of hostile takeovers.
Knowledge Booster
Similar questions
- Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors. Is this true or false?arrow_forwardExplain how repurchases can (1) help stockholders limit taxes and (2) help firmschange their capital structures.arrow_forwardWhich of the following statements is true? O The secondary market is important because its existence increases the amount of capital that publicly traded firms can raise when they issue securities. O The secondary market is unimportant for publicly traded firms. The secondary market is important because it is where publicly traded firms raise capital.arrow_forward
- Which of the following is correct a. In a leveraged recapitalization, a firm uses its excess cash to buyback shares b. In an LBO, a firm borrows and repurchases its shares thereby reducng the number of shares outstanding. c. In a leveraged recapitalization, a change of ownership occurs as the firm is sold d. In an LBO, debt is a major component of the financing and a change of control occurs. e. In an LBO, managers use excess cash to repurchase sharesarrow_forwardWhich of the following would not be an appropriate reason for a firm to repurchase its stock: As an investment if management believes the market has undervalued the stock price. In order to have sufficient shares to cover employee stock programs. Solely to boost Earnings Per Share. Both A and B.arrow_forwardCompanies are more apt to choose repurchases over dividends if doing so will enable them to I. take advantage of a market undervaluation of their shares. II. maintain or increase the value of executive stock options. III. offset the dilution created by the exercise of executive stock options. IV. distribute revenue increases that are considered temporary or short-term in nature.arrow_forward
- Which of the following statements is CORRECT? One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the capital structure. The threat of takeover generally increases potential conflicts between stockholders and managers. Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. The threat of takeovers tends to reduce potential conflicts between stockholders and managers. The creation of the Securities and Exchange Commission (SEC) eliminated conflicts between managers and stockholders.arrow_forwardIf the stock market is efficient, why do companies manage their earnings? O To avoid violating debt covenants. O To receive bonuses based on reported earnings. O Because companies do not believe the Efficient Market Hypothesis. O All of the above.arrow_forwardA corporation might have treasury stock listed on their financials for all the following reasons except: A. they wish to control the market price B. they wish to be a majority stockholder C. they wish to limit dividend payments D. they wish to avoid takeoverarrow_forward
- Which of the following does not apply to secondary markets? Group of answer choices Many investors might be unwilling to provide resources to corporations if there is no available mechanism for the future sale of their stocks and bonds to others. Transactions help to establish market prices for additional shares that may be issued in the future. Transactions are important to the efficient allocation of resources in our economy. New resources are provided when shares of stock are sold by the corporation to the initial owners.arrow_forwardWhat were the direct and indirect costs of the LIBOR scandal for Barclays? Are these costs only a part of the reality for investment banks and a necessary risk to produce the profits required by their shareholders ?arrow_forwardGenerally, managers of corporations prefer internally generated cash to finance their capital expenditures because I) they can avoid the discipline of financial markets; II) the costs of issuing new securities are high; III) the announcement of a new equity issue is usually bad news for investors Multiple Choice I, II, and III I only II and III only Il onlyarrow_forward
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