Midterm Review Questions PDF

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1. A semistrong form efficient market is distinct from a weak form efficient market in historical prices by: A) incorporating only random movements in the price. B) incorporating all publicly available information in the price. C) incorporating inside information in the price. D) All of the above. E) None of the above. 2. Arguments to explain why most equity issues are underwritten versus sold through a rights offering are: A) cash proceeds are available sooner in underwriting and the issue is available to a wider market. B) underwriters buy at an agreed upon price and bear some risk of selling the issue. C) investment bankers can provide market advice and certify the issue for potential investors. D) All of the above E) None of the above. 3. The New World Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price of $27/share, calculate the value of a right. A) $4/right B) $2/right C) $3/right D) $1/right E) None of the above 4. Which of the following statements is false? A) Creditors do not have voting power. B) Payment on interest on debt in considered an expense, while payment of dividends is a return on capital. C) Unpaid debt is a liability of the firm, and if not paid, can result in liquidation of the firm. Unpaid common stock dividends cannot force liquidation. D) One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt. E) None of the above

5. To finance the construction of a new plant, Benefield Inc. must raise an additional $10,000,000 of equity capital through the sale of common stock. The firm currently has an EPS of $5.40 and a

P/E ratio of 10, with 1,200,000 shares outstanding. If the firm wants its ex-rights price to be $50, what subscription price must it set on the new shares? A) $29.55 B)

$33.78

C)

$39.28

D) $41.80 E)

$50.00

6. The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient. A) weak B) semiweak C) semistrong D) strong E) perfect 7.

Which of the following help convince managers to work in the best interest of the stockholders? I. compensation based on the value of the stock II. stock option plans III. threat of a proxy fight IV. threat of conversion to a partnership A) I and II only B) II and III only C) I, II and III only D) I and III only E) I, II, III, and IV

8. Which of the following is not true about serial correlation? A) It measures the correlation between the current return on a security and the current return on another security. B) It involves only one security. C) Positive serial correlation indicates a tendency for continuation. D) Negative serial correlation indicates a tendency toward reversal. E) Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form.

9. Debt that may be extinguished before maturity is referred to as: A) sinking-fund debt. B) debentures. C) callable debt. D) indenture debt. E) None of the above.

10. The LaPorte Corporation has a new rights offering, you can buy one share of stock with 3 rights and $20 per share. The stock is now selling ex-rights for $26. The price rights-on is A) $22.00 . B) $24.00 . C) $26.00 . D) $28.00. E) impossible to determine without the cum-rights price.

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