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Quiz 2

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19 views7 pages

Quiz 2

Uploaded by

shujaitbukhari
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Quiz/mock

Another name for direct cost is:

A) Overheads
B) Prime cost
C) Marginal cost
D) Variable costs
E) Indirect cost

A company is planning to trade its shares. How can the company determine the
pre-IPO value of its stock?
A) The compensation committee uses the Black-Scholes model or a binomial
model to calculate the stock’s value
B) The company looks at the stock price of its closest publicly traded
competitor
C) The board of directors hires a valuation firm to estimate the fair market
value of the company’s stock.
D) Any of the above

Younis Ltd manufactures paints. Which of the items below are direct costs for the
business (tick all that applies):

a) The cost of dyes


b) The cost of containers for the paint
c) Chemicals used for production of the paint
d) Delivery van
e) Rent for the staff room
Who underwrites an IPO?

Department of the Treasury


Federal Reserve
Securities and Exchange Commission (SEC)
Investment bank

What is 'IPO underpricing'?

The securities offered in the IPO are undersold.


The issuing company is undervalued during the investment analysis.
The initial offering price is lower than the market price immediately after the
IPO.
The IPO fails to raise the projected capital.

Initial Public Offering (IPO) is ...........?

The first sale of stock by a company to the public


The creation of a new financial asset by a private company
Acquisition of a public company by a private company
Sale of government securities to the public

Who plays a key role in determining the offer price during an IPO?

The retail investors


The Securities and Exchange Commission (SEC)
The underwriters
The stock exchanges

An advantage of using debt finance to help a business grow is that:


There is no loss of shareholders' control
The debt won’t need to be repaid for 5 years
Interest costs will be low
A growing business will always need more debt
Financial markets that facilitate the flow of long-term funds with maturities of
more than one year are known as ____________.
money markets
capital markets
primary markets
secondary markets

Financial markets facilitating the issuance of new securities are known as


____________.
money markets
capital markets
primary markets
secondary markets

_________ are financial contracts whose values are obtained from the values of
underlying assets.
Bonds
Mortgages
Stocks
Derivatives

_________ are depository financial institutions.

Savings banks
Finance companies
Mutual funds
Securities firms

The issue of shares on the stock exchange for the first time is a/an:
IPO
Rights issue
Equity withdrawal
Flotation
Dividend

A cash flow benefit of trade credit is that


Interest is not normally charged
Suppliers will require dividends
Payments must be made on time
There is a loss of business ownership
Secondary markets help support primary markets because secondary markets
I) Offer primary market purchasers' liquidity for their holdings
Ii) Update the price or value of the primary market claims
Iii) Reduce the cost of trading the primary market claims

A. i only
B. Ii only
C. I and ii only
D. Ii and iii only
E. I, ii and iii

A company is issuing 1 million shares in an IPO at an offering price


of $25 per share. What are the gross proceeds from this IPO?

A) $25,000
B) $250,000
C) $2,500,000
D) $25,000,000

Correct Answer: D

A company raises $20,000,000 in an IPO. If the underwriter's fee is


5%, how much is the underwriter's fee?

A) $100,000
B) $500,000
C) $1,000,000
D) $2,000,000

Correct Answer: C

What is the principal-agent problem in agency theory?

A) A conflict of interest between shareholders and the board of directors.


B) A situation where the agent acts in the best interest of the principal.
C) A conflict of interest between the principal and agent, where the agent may
act in their own interest rather than the principal's.
D) A scenario where the principal is unaware of the agent's actions.

Correct Answer: C

Which of the following mechanisms can help align the interests of the principal
and agent? A) Ignoring the agent's performance.
B) Offering the agent a fixed salary regardless of performance.
C) Implementing performance-based incentives for the agent.
D) Allowing the agent complete autonomy without monitoring.

Correct Answer: C

Which of the following is an example of the principal-agent problem? A) A manager choosing


to expand the business to increase long-term profits.
B) An employee working overtime to complete a project.
C) A CEO investing in a high-risk project that benefits them personally but exposes the company
to potential losses.
D) A board of directors increasing the dividends to shareholders.

Correct Answer: C

Which of the following mechanisms can help align the interests of the principal and agent? A)
Ignoring the agent's performance.
B) Offering the agent a fixed salary regardless of performance.
C) Implementing performance-based incentives for the agent.
D) Allowing the agent complete autonomy without monitoring.

Correct Answer: C

In agency theory, who typically serves as the principal?

A) The CEO of the company.


B) The board of directors.
C) The shareholders or owners of the company.
D) The employees of the company.

Correct Answer: C
A company raises $20,000,000 in an IPO. If the underwriter's fee is 5%, how much
is the underwriter's fee? A) $100,000
B) $500,000
C) $1,000,000
D) $2,000,000

Correct Answer: C
(Explanation: Underwriter Fee = Gross Proceeds × Underwriter's Fee Percentage =
$20,000,000 × 5% = $1,000,000)

A company issues shares in an IPO and generates gross proceeds of


$50,000,000. If the underwriter charges a 3% fee, what is the amount of the
underwriter's fee? A) $150,000
B) $1,500,000
C) $3,000,000
D) $15,000,000

Correct Answer: B
(Explanation: Underwriter Fee = Gross Proceeds × Underwriter's Fee Percentage =
$50,000,000 × 3% = $1,500,000)

A company raises $30,000,000 in an IPO. The underwriter's fee is 6%. What are
the net proceeds to the company?

A) $28,200,000
B) $29,400,000
C) $30,000,000
D) $31,800,000

Correct Answer: A
(Explanation: Net Proceeds = Gross Proceeds - Underwriter Fee = $30,000,000 -
($30,000,000 × 6%) = $30,000,000 - $1,800,000 = $28,200,000)

A company issues shares and generates gross proceeds of $75,000,000. The


underwriter's fee is 4%. What are the net proceeds to the company? A)
$72,000,000
B) $72,500,000
C) $73,000,000
D) $75,000,000

Correct Answer: B
(Explanation: Net Proceeds = Gross Proceeds - Underwriter Fee = $75,000,000 -
($75,000,000 × 4%) = $75,000,000 - $3,000,000 = $72,000,000)

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