Fi516 Week 7 Quize

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1. Question : (TCO D) Which of the following statements concerning common stock and the investment banking process is NOT CORRECT? (a) The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue. (b) If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market. (c) Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm. (d) Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer. (e) The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue. Student Answer: d Instructor Explanation: Answer is: d Chapter 20, pp. 791 - 798, 800 - 803 Points Received: 20 of 20 Comments: 2. Question : (TCO D) Europa Corporation is financing an ongoing construction project. The firm will need $5,000,000 of new capital during each of the next three years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40 percent debt and 60 percent equity, and it wants to be at that structure in three years, when the project has been completed. Debt flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds. Yearly flotation costs for three separate

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