Strayer FIN540 Week 5 Midterm Exam

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Strayer FIN540 Week 5 Midterm ExamTRUE/FALSE1. If its managers make a tender offer and buy all shares that were not held by the managementteam, this is called a private placement.a.Trueb.False2. Going public establishes a market value for thefirm's stock, and it also ensures that a liquidmarket will continue to exist for the firm's shares. This is especially true for small firms that arenot widely followed by security analysts.a.Trueb.False3. The cost of meeting SEC and possibly additional state reporting requirements regardingdisclosure of financial information, the danger of losing control, and the possibility of an inactivemarket and an attendant low stock price are potential disadvantages of going public.a.Trueb.False4.The term "leaving money on the table" refers to the situation where an investment bankinghouse 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 wouldnormally earn on the job.a.Trueb.False5. Whereas commercial banks take deposits from some customers and make loans to othercustomers, the principal activities of investment banks are (1) to help firms issue new stock andbonds 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 andothers that are investment banks. This was not true some years ago, when the two types of bankswere required by law to be completely independent of one another.a.Trueb.False6. The term "equity carve-out" refers to the situation where a firm's managers give themselvesthe right to purchase new stock at a price far below the going market price. Since this dilutes thevalue of the public stockholders, it "carves out" some of their value.a.Trueb.False7. Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted.Since thenlong-term rates (10 years or longer) have remained constant, but the yield curve hasresumed its normal upward slope. Under such conditions, a bond refunding would almostcertainly be profitable.

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a.Trueb.False8. The appropriate discount rate to use when analyzing a refunding decision is the after-tax costof new debt, in part because there is relatively little risk of not realizing the interest savings.a.Trueb.False9. If the firm uses the after-tax cost of new debt as the discount rate whenanalyzing a refundingdecision, and if the NPV of refunding is positive, then the value of the firm will be maximized ifit immediately calls the outstanding debt and replaces it with an issue that has a lower couponrate.a.Trueb.False10. When a firm refunds a debt issue, the firm's stockholders gain and its bondholders lose. Thispoints out the risk of a call provision to bondholders and explains why a non-callable bond willtypically command a higher price than an otherwise similar callable bond.a.Trueb.FalseMULTIPLE CHOICE11. Which of the following is generallyNOTtrue 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 thelisting fee.b.Listing provides a company with some "free" advertising, and it may enhance the firm'sprestige and help it do more business.c.Listing reduces the reporting requirements for firms, because listed firms file reports with theexchange 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.13. Which of the following statements is most CORRECT?a.Private placements occur most frequently with stocks, but bonds can also be sold in a privateplacement.b.Private placements are convenient for issuers, but the convenience is offset by higherflotation costs.c.The SEC requires that all private placements be handled by a registered investment banker.d.Private placements can generally bring in funds faster than is the case with public offerings.

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