Q&A Hero

Q: An explicit cost is A) a nonmonetary opportunity cost. B) a cost specifically related to government rules and regulations. C) a cost that involves spending money. D) a cost unique to corporations.

Q: What are liabilities? A) anything of value owned by a person or a business B) anything a person or a business owes to entities outside the business C) the total cost of labor for a firm D) only those unpaid expenses for which a business or person is making interest payments

Q: What role do well functioning financial markets play in a market economy?

Q: If you own a bond with a 3 percent coupon rate and new bonds are paying 8 percent, what will happen to your bond's market price?

Q: Who is the seller in a primary market and who is the seller in a secondary market?

Q: How does a firm raise external funds through direct finance?

Q: How can a sole proprietorship raise funds needed for firm expansion?

Q: What is the difference between retained earnings and dividends?

Q: If you own a bond with a seven percent coupon rate and new bonds are paying five percent, what will happen to your bond's market price?

Q: How do firms raise external funds through indirect finance?

Q: What is a corporate bond and what does it specify?

Q: How can a partnership raise funds needed for firm expansion?

Q: Indirect finance includes the sale by a corporation of stocks or bonds, but does not include borrowing money from a bank.

Q: If you purchase a share of stock from your friend who initially purchased the stock three years ago, your purchase of the stock represents a transaction in the primary financial market

Q: Direct finance includes the sale by a corporation of stocks or bonds, but does not include borrowing money from a bank.

Q: If you purchase a share of stock from your friend who initially purchased the stock three years ago, your purchase of the stock represents a transaction in the secondary financial market

Q: Generally with bond ratings, the lower the rating, the ________ the interest rate an investor will receive and the ________ the the risk that the issuer of the bond will default. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

Q: Article Summary Starting as a Chicago antique store that sold sandwiches on the side, Potbelly has grown from this 1977 beginning into a company which today operates approximately 300 sandwich shops in the United States. In October 2013, Potbelly sold stock for the first time through an initial public offering (IPO), with shares jumping in price from the initial offering price of $14 to more than $32 on the same day. Since 2011, Potbelly has seen an increase in in both sales and revenue, and earned a profit of $2.8 million in the first half of 2013. Source: Matt Krantz, "Potbelly IPO shares more than double on open," USA Today, October 4, 2013. When Potbelly sold stock to the public in its IPO, it did so through the NASDAQ market. This was an example of Potbelly using ________ to raise funds. A) indirect finance B) direct finance C) bonds D) corporate governance

Q: Article Summary Starting as a Chicago antique store that sold sandwiches on the side, Potbelly has grown from this 1977 beginning into a company which today operates approximately 300 sandwich shops in the United States. In October 2013, Potbelly sold stock for the first time through an initial public offering (IPO), with shares jumping in price from the initial offering price of $14 to more than $32 on the same day. Since 2011, Potbelly has seen an increase in in both sales and revenue, and earned a profit of $2.8 million in the first half of 2013. Source: Matt Krantz, "Potbelly IPO shares more than double on open," USA Today, October 4, 2013. When Potbelly sold stock to the public in its IPO, it did so through the NASDAQ market. This was an example of Potbelly raising funds through A) reinvesting retained earnings. B) a financial intermediary. C) dividend reinvestment. D) a financial market.

Q: When Zynga, the company behind the social games CityVille and Words With Friends, sold stock to the public for the first time in December 2011, funds were being raised in a ________ market, and when those newly issued shares are resold to other buyers, the sales take place in a ________ market. A) primary; primary B) primary; secondary C) secondary; primary D) secondary; secondary

Q: In 2011, the dividend yield on Microsoft (MSFT) stock rose from 1.97% to 3.10%. Which of the following would have generated that result? A) The closing price of Microsoft stock rose. B) Microsoft announced an increase in the dividend it would pay per share. C) The price-earnings ratio rose. D) Microsoft issued bonds with a coupon rate equal to 3.10%.

Q: A bond's coupon payment divided by the bond's current price is equal to the bond's A) dividend yield. B) current yield. C) price-earnings ratio. D) maturity value.

Q: What are earnings per share equal to? A) the last dividend payment made B) total dividend payments plus retained earnings divided by outstanding stock shares C) the amount by which the stock's market price has increased in the last year D) revenues divided by the number of stockholders

Q: In October 2013, Abercrombie & Fitch (ANF) posted a price-earnings ratio of 13. If the price of the stock at that time was $36 per share, which of the following must have been true? A) ANF's revenues that month were $4.68 million. B) ANF's earnings per share was $2.77. C) ANF's coupon payment was $23.23 per year. D) ANF's dividend yield for the year was 47%.

Q: How is a stock's price-earnings ratio found? A) by dividing the dividend by the closing price of the stock B) by dividing the dividend by the firm's earnings per share C) by dividing current market price of the stock by the firm's earnings per share D) by subtracting the firm's earnings per share from the closing price of the stock

Q: The volatility of a stock's market price is indicated by A) the highest stock price and the lowest stock price over the previous year. B) the price of newly issued shares compared to the price of previously issued shares. C) the difference between the stock's selling price and its asking price. D) the stock's price-earnings ratio.

Q: A stock's dividend yield is determined by A) dividing the dividend payment by the stock's initial price. B) dividing the dividend payment by the stock's closing market price. C) dividing the stock's closing market price by the dividend payment. D) subtracting the stock's initial purchase price from the stocks' closing market price on a given day.

Q: You have a bond that pays $60 per year in coupon payments. Which of the following would result in a decrease in the price of your bond? A) Coupon payments on newly-issued bonds fall to $40 per year. B) The likelihood that the firm issuing your bond will default on debt decreases. C) The price of a share of stock in the company rises. D) Coupon payments on newly-issued bonds rise to $75 per year.

Q: When the coupon rate on newly issued bonds increases relative to older, outstanding bonds, what happens? A) The market price of the older bond falls in the secondary market. B) The market price of the older bond rises in the secondary market. C) Older bonds can still be sold at their face value. D) Older bonds will sell for less than their face value.

Q: Securities dealers that trade stocks and bonds outside exchanges comprise the A) foreign exchange market. B) over-the-counter market. C) NASDAQ market. D) outlet market.

Q: When you buy previously-issued shares of Facebook stock, this transaction takes place in the A) primary market. B) bond market. C) secondary market. D) bear market.

Q: The three most widely followed stock indexes in the United States include all of the following except A) the Dow Jones Industrial Average. B) the S&P 500. C) the Fortune 500. D) The NASDAQ.

Q: What happens in the primary market? A) primary inputs like electricity are sold B) a corporate financial manager will resell previously issued shares of stock C) newly issued claims are sold by the borrowing firm to the initial buyer D) already issued claims are sold from one investor to another

Q: What is a secondary market? A) a market where factory seconds and damaged merchandise are sold B) a market where newly issued bonds are sold to initial buyers by the borrowing firm C) a market where a newly issued stocks are sold to initial buyers by the borrowing firm D) a market where you can sell any stocks you own as a private investor

Q: If a corporation goes bankrupt, bondholders have ________ on the firm's assets. A) no claim B) third claim, after the IRS and stockholders, C) second claim, after stockholders, D) first claim

Q: If a corporation retains all its profits and distributes none of the profit to owners, how can owners benefit? A) If the retained earnings are expected to create future profits, the market price of the firm's stock will increase and create a capital gain for stockholders if the stock is sold. B) Shares of stock can be converted into bonds so stockholders will be able to earn coupon payments. C) Owners will only benefit if some profits are paid out in the form of dividends. D) Owners will benefit by changing the board of directors.

Q: Owners of a corporation share in the profits of the firm A) by selling any bonds or stocks owned and realizing a capital gain. B) through coupon payments on that firm's bonds. C) through dividend payments on shares of that firm's stock. D) by raising the interest rate on bonds.

Q: The coupon rate of a bond is equal to A) the coupon payment. B) the interest payment. C) the interest rate. D) the face value.

Q: When an investor buys a corporate bond, the ________ the bond is a loan to the corporation. A) interest on B) face value of C) coupon payment on D) dividend payment on

Q: If a corporate bond with a face value of $2,000 pays yearly coupon payments of $50, what is the coupon rate? A) 2.5% B) 4% C) 25% D) 40%

Q: If a corporate bond with face value of $5,000 has an interest rate of 4 percent paid once a year for a term of 30 years, what is the size of the coupon payment? A) $4 B) $200 C) $1,250 D) $5,000

Q: Which of the following is a characteristic of a bond? A) A bond represents a promise to repay a fixed amount of funds. B) The face value or principal plus interest is repaid at a specified period of time. C) The length of coupon payments is fixed by the stated maturity period. D) All of these are characteristic of bonds.

Q: All of the following represent differences between stocks and bonds except A) a stock can possibly pay dividends forever, but bonds have a fixed number of payments. B) differences of opinion about a stock's future may vary considerably but there is less difference about a bond's future. C) the future growth of a stock is more uncertain than the payments of a bond. D) bonds represent partial ownership in a firm but stocks do not.

Q: Dividends are A) financial securities which represent ownership in a corporation. B) the yearly payments associated with bonds. C) the interest rate paid on shares of stock. D) payments by a corporation to its shareholders.

Q: A financial security that represents a promise to repay a fixed amount of funds is a A) share of stock. B) coupon. C) dividend. D) bond.

Q: Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store, and the company wishes to raise the funds through direct finance. Which of the following methods could it use? A) It could sell $8 million in bonds. B) It could borrow $8 million from a bank. C) It could issue $8 million in stocks. D) It could choose either A or C.

Q: If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store, this is an example of A) a stock market transaction. B) direct finance. C) a bond market transaction. D) indirect finance.

Q: Which of the following does not take place in the direct finance market? A) Ownership in corporations is sold in the form of common stock. B) Deposits from savers are accumulated and loans made to borrowers. C) Ownership in corporations is sold in the form of preferred stock. D) Corporate bonds are sold to savers.

Q: Raising funds through financial intermediaries is called A) direct finance. B) corporate finance. C) indirect finance. D) dividend reinvestment.

Q: What is the central role of financial intermediaries in a market economy? A) the creation and printing of money B) keeping the price level stable C) bringing together savers and borrowers D) providing safe deposit boxes for people and businesses

Q: A proprietorship or partnership can raise funds for expansion in all of the following ways except A) borrowing from someone or an institution willing to lend the funds. B) reinvesting profit back into the business. C) taking on a partner or more partners. D) issuing stock through financial markets.

Q: In August 2011, Standard & Poor's (S&P) changed its rating on U.S. Treasury bonds from ________ based on the state of the federal government's budget deficit. A) "A" to "D" B) "A" to "AAA" C) "A+" to "B+" D) "AAA" to "AA+"

Q: Generally with bond ratings, the higher the rating, the ________ the interest rate an investor will receive and the ________ the the risk that the issuer of the bond will default. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

Q: In 2013, the dividend yield on Abercrombie & Fitch (ANF) stock rose from a low of 1.33% in May to 2.24% in October. Which of the following would have generated that result? A) The closing price of ANF stock rose. B) ANF announced an increase in the dividend it would pay per share. C) The price-earnings ratio fell. D) ANF issued bonds with a coupon rate equal to 2.24%.

Q: Total dividend payments plus retained earnings divided by outstanding stock shares equals A) the price-earnings ratio. B) earnings per share. C) the dividend yield. D) the year-to-date percentage change.

Q: In October 2013, General Motors (GM) posted a price-earnings ratio of 10.13. If the price of the stock at that time was $36 per share, which of the following must have been true? A) GM's revenues that month were $364.68 million. B) GM's earnings per share was $3.55. C) GM's coupon payment was $36 per year. D) GM's dividend yield for the year was 36.5%.

Q: Dividing the current market price of a stock by the firm's earnings per share gives the firm's A) price-earnings ratio. B) year-to-date percentage change. C) dividend yield. D) stock coupon maturity yield.

Q: What do the highest stock price and the lowest stock price over the previous year indicate? A) Add them together and divide by two to get the stock's current market price. B) what the stock's price-earnings ratio is C) how volatile the stock's market price has been D) They generate the dividend yield.

Q: Dividing the dividend payment by the stock's closing market price determines the A) coupon payment. B) dividend yield. C) price-earnings ratio. D) selling price of the stock.

Q: You have a bond that pays $60 per year in coupon payments. Which of the following would result in an increase in the price of your bond? A) Coupon payments on newly-issued bonds rise to $80 per year. B) The likelihood that the firm issuing your bond will default on debt increases. C) The price of a share of stock in the company falls. D) Coupon payments on newly-issued bonds fall to $50 per year.

Q: When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds, what happens? A) The market price of the older bond falls in the secondary market. B) The market price of the older bond rises in the secondary market. C) Older bonds can still be sold at their face value. D) Older bonds will sell for more than their face value.

Q: One of the most widely followed stock indexes in the United States is the Dow Jones Industrial Average. This index represents A) the stock prices of 500 large U.S. firms. B) an over-the-counter market. C) the stock prices of more than 4,000 U.S. firms. D) the stock prices of 30 large U.S. corporations.

Q: Which of the following is part of the secondary market? A) New York Stock Exchange B) the over-the-counter market C) NASDAQ D) all of these

Q: When you buy newly-issued shares of Facebook stock, this transaction takes place in the A) primary market. B) bond market. C) secondary market. D) bear market.

Q: What happens in the secondary market? A) secondary inputs like electricity are sold B) a corporate financial manager will raise funds for expansion of the firm C) newly issued claims are sold by the borrowing firm to the initial buyer D) already issued claims are sold from one investor to another

Q: What is a primary market? A) a market where primary inputs like steel are sold B) a market where you can sell any bonds you own as a private investor C) a market where a newly issued claims are sold to initial buyers by the borrowing firm D) a market where you can sell any stocks you own as a private investor

Q: If a corporation goes bankrupt, which of the following has first claim on the firm's assets? A) stockholders B) the state where chartered C) employees D) bondholders

Q: The profits a corporation keeps to finance future expansion are known as A) retained earnings. B) preferred stock. C) dividends. D) capital gains.

Q: If a corporation earns a profit, how do owners of the firm share in the profit? A) through coupon payments on that firm's bonds B) through dividend payments on shares of that firm's stock C) by selling any bonds or stocks owned and realizing a capital gain D) by raising the interest rate on bonds

Q: The interest payment on a bond is called A) the coupon payment. B) principal. C) the interest rate. D) the face value.

Q: When an investor buys a corporate bond A) the investor becomes part owner of the corporation. B) the principal of the bond is a loan to the corporation. C) the interest made on the bond represents the bondholder's limited liability in the company. D) the face value of the bond is equal to what the investor paid for the bond.

Q: If a corporate bond with a face value of $5,000 pays yearly coupon payments of $100, what is the coupon rate? A) 2% B) 5% C) 10% D) 20%

Q: If a corporate bond with face value of $1,000 has an interest rate of eight percent paid once a year for a term of 30 years, what is the size of the coupon payment? A) $1,000 B) $300 C) $80 D) $8

Q: Payments by a corporation to its shareholders are known as A) stocks. B) bonds. C) coupons. D) dividends.

Q: Which of the following is a characteristic of stock? A) Stock represents a promise to repay a fixed amount of funds. B) The face value or principal plus interest is repaid at a specified period of time. C) The length of coupon payments is fixed by the stated maturity period. D) Stock represents ownership in a firm

Q: What is different about buying stocks and buying bonds? A) A stock can possibly pay dividends forever, but bonds have a fixed number of payments. B) Differences of opinion about a stock's future may vary considerably but there is less difference about a bond's future. C) The future growth of a stock is more uncertain than the payments of a bond. D) All these are differences between stocks and bonds.

Q: A bond is a financial security that represents A) ownership in a corporation. B) the portion of profits paid to shareholders. C) the interest rate paid on a share of stock. D) a promise to repay a fixed amount of funds.

Q: Southwest Airlines wants to raise $20 million to finance the renovation of their corporate offices, and the company wishes to raise the funds through direct finance. Which of the following methods could it use? A) It could issue $20 million in stocks. B) It could sell $20 million in bonds. C) It could borrow $20 million from a bank. D) It could choose either A or B.

Q: If Southwest Airlines borrows $20 million from a bank to finance the renovation of their corporate offices, this is an example of A) a bond market transaction. B) indirect finance. C) a stock market transaction. D) direct finance.

Q: Which of the following takes place in the direct finance market? A) Firms borrow funds from banks. B) Deposits from savers are accumulated and loans made to borrowers. C) Ownership in corporations is sold in the form of preferred stock. D) Banks offer savings accounts to customers.