Q&A Hero

Q: (I) Capital market securities fall into two categories: bonds and stocks. (II) Long-term bonds include government bonds and long-term notes, municipal bonds, and corporate bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: The primary purpose of the buyer adjusting the seller earnings is to provide an accurate estimate of the current years operating income or cash flow in the base year. True or False

Q: (I) There are two types of exchanges in the secondary market for capital securities: organized exchanges and over-the-counter exchanges. (II) When firms sell securities for the very first time, the issue is an initial public offering. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: If the buyer believes that the seller has overstated revenue in a specific accounting period, the buyer can reconstruct revenue by examining usage levels, in the same accounting period, of the key inputs required to produce the product or service. True or False

Q: Individuals and households frequently purchase capital market securities through financial institutions such as A) mutual funds. B) pension funds. C) money market mutual funds. D) all of the above. E) only A and B of the above.

Q: Membership or subscription businesses, such as health clubs and magazine publishers, may inflate revenue by booking the full value of muliyear contracts in the first year of the contract. True or False

Q: The largest purchasers of capital market securities are A) households. B) corporations. C) governments. D) central banks.

Q: Private firms must file quarterly earnings reports with the Securities and Exchange Commission. True or False

Q: The distribution of a firm's capital between debt and equity is its A) current ratio. B) liability structure. C) acid ratio. D) capital structure.

Q: Because of data limitations, valuation of private firms often requires more subjective adjustments than for public firms. True or False

Q: (I) The primary issuers of capital market securities are financial institutions. (II) The largest purchasers of capital market securities are corporations. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: Managers and owners in public companies are likely to have the same emotional attachment to their businesses as those in private firms. True or False

Q: (I) The primary issuers of capital market securities are federal and local governments, and corporations. (II) Governments never issue stock because they cannot sell ownership claims. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: The availability and reliability of data for public companies tends to be much greater than for small private firms. True or False

Q: Governments never issue stock because A) they cannot sell ownership claims. B) the Constitution expressly forbids it. C) both A and B of the above. D) neither A nor B of the above.

Q: Private businesses may need to be valued to settle shareholder disputes, court cases, divorce, or the payment of gift or estate taxes. True or False

Q: The primary issuers of capital market securities include A) the federal and local governments. B) the federal and local governments, and corporations. C) the federal and local governments, corporations, and financial institutions. D) local governments and corporations.

Q: A firm will borrow long-term A) if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt. B) if the extra interest cost of borrowing short-term due to rising interest rates does not exceed the expected premium that is paid for borrowing long-term. C) if short-term interest rates are expected to decline during the term of the debt. D) if long-term interest rates are expected to decline during the term of the debt.

Q: Empirical evidence suggests that discounts have declined in recent years. True or False

Q: The primary reason that individuals and firms choose to borrow long-term is to A) reduce the risk that interest rates will fall before they pay off their debt. B) reduce the risk that interest rates will rise before they pay off their debt. C) reduce monthly interest payments, as interest rates tend to be higher on short-term than long-term debt instruments. D) reduce total interest payments over the life of the debt.

Q: Shell corporations may have significant value to acquiring firms. True or False

Q: The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will ________ before they pay off their debt. A) rise B) fall C) become more volatile D) become more stable

Q: The risk associated with an illiquid market for a specific stock is referred to as the liquidity or marketability risk. True or False

Q: (I) Firms and individuals use the capital markets for long-term investments. (II) Capital markets provide an alternative to investment in assets such as real estate and gold. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: Asset valuation includes specific business risks but ignores any adjustment for liquidity risk. True or False

Q: (I) Securities that have an original maturity greater than one year are traded in money markets. (II) The best known money market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: Methodologies employed to value private firms are substantially different from those employed to value public firms. True or False

Q: It is easier to obtain the fair market value of private companies than for public companies because of the absence of volatile stock markets. True or False

Q: (I) Securities that have an original maturity greater than one year are traded in capital markets. (II) The best known capital market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: Compared to money market securities, capital market securities have A) more liquidity. B) longer maturities. C) lower yields. D) less risk.

Q: An increase in the target firms reserves for doubtful accounts increases taxable income, while a decrease reduces the firms taxable income. True or False

Q: Employee benefit levels in private firms are almost always mandated by state or federal law and therefore cannot be changed. True or False

Q: The Commodity Futures Modernization Act (2000) removed derivative securities, such as CDSs, from regulatory oversight. This change opened the door for speculators to bet on the health of a company or pool of assets, and was certainly a culprit in the 2007-2009 financial crisis. Why did Congress pass such legislation?

Q: Explain the different types of corporate bonds.

Q: The purpose of adjusting the targets income statement is to provide an accurate estimate of the current years reported operating income or operating cash flow. True or False

Q: What types of risks should bondholders be aware of and how do these affect bond prices and yields?

Q: If a buyer expects that the target firms revenue has been overstated, the buyer can reconstruct revenue by examining usage levels of the key inputs required to produce the product or service. True or False

Q: What is a callable bond? How does the callability feature affect the bond's price and interest rate?

Q: Revenue may be inflated by booking as revenue products shipped to resellers without adequately adjusting for probable returns. True or False

Q: Distinguish between general obligation and revenue municipal bonds.

Q: Private firms are likely to understate revenue and understate costs in order to minimize their tax liabilities. True or False

Q: What is a bond's current yield? How does the current yield differ from the yield to maturity and what determines how close the two values are?

Q: For privately held firms, firm specific risk may include lack of product, industry, and geographic diversification; limited management depth, volatile stock markets, and unionized workforces. True or False

Q: What is a convertible bond? How does the convertibility feature affect the bond's price and interest rate?

Q: Financial information for both public and private firms is equally reliable because their statements are audited by outside accounting firms to ensure that are developed in a manner consistent with GAAP. True or False

Q: What are Treasury STRIPS?

Q: Both public and private firms always attempt to maximize earnings growth. True or False

Q: What is the difference between a general obligation bond and a revenue bond?

Q: Identify alternative deal structures Pacific Wardrobe might have employed in order to complete the transaction. Discuss why these alternatives might have been superior or inferior to the one actually chosen.

Q: What role do restrictive covenants play in bond markets?

Q: Discuss some of the challenges that Pacific Wardrobe is likely to experience during due diligence.

Q: What is a bond indenture?

Q: What is the purpose of the capital market? How do capital market securities differ from money market securities in their general characteristics?

Q: What were the key assumptions implicit in Pacific Wardrobes acquisitions plan, with respect to the market, valuation, and integration? Comment on the realism of these assumptions.

Q: General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment.

Q: Calculating COE and WACC

Q: Why was the shell corporation financed through a private placement?

Q: The secondary market is where new issues of stocks and bonds are introduced.

Q: What are the advantages of employing a reverse merger strategy in this instance?

Q: The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.

Q: What do you believe might be some of the unique challenges in valuing a family-owned business? Be specific.

Q: The Commodity Futures Modernization Act (2000) removed derivative securities, such as credit default swaps, from regulatory oversight.

Q: What other alternatives could Nick have pursued? Discuss the advantages and disadvantages of each.

Q: A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults.

Q: Succession planning issues are often a reason for family-owned businesses to sell. Why do you believe it may have been easier for Nick than his father to sell the business to a non-family member?

Q: In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock.

Q: The purchase price consisted of cash, stock, and an earnout. What are some of the factors that might have determined the purchase price from the sellers perspective? From the buyers perspective?

Q: Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer.

Q: A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year.

Q: Speculate why Cantel may have chosen to operate Crosstex as a wholly-owned subsidiary following closing. Be specific

Q: What factors might cause Crosstexs net asset value to change between signing and closing of the agreement of purchase and sale?

Q: The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion. Discuss how the subprime meltdown and collapse of the ABCP market almost led to the collapse of the money market mutual fund market as well.

Q: What do you believe could have been the primary factors causing Crosstex to accept Cantels offer?

Q: Explain how and why repurchase agreements would be used.

Q: What were the primary reasons Cantel wants to acquire Crosstex? Be specific.

Q: What are the major types of securities and who are the major participants in the money markets?

Q: Why do you believe Panda did not directly approach Cirraco ? How were the Panda Grove investment holdings used to influence the outcome of the proposed merger?

Q: What are the main characteristics of money market securities?

Q: Why did Panda Ethanol undertake a private equity placement totaling $90 million shortly before implementing the reverse merger?

Q: How are Treasury bills sold? How do competitive and noncompetitive bids differ?