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Banking
Q:
Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.
B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults.
C) the borrower's lack of incentive to seek a loan for highly risky investments.
D) none of the above.
Q:
The concept of adverse selection helps to explain
A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.
B) why indirect finance is more important than direct finance as a source of business finance.
C) why direct finance is more important than indirect finance as a source of business finance.
D) only A and B of the above.
E) only A and C of the above.
Q:
Antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for how their competitors might react. True or False
Q:
Whenever either the acquiring or the target firms stock is publicly traded, the transaction is subject to the substantial reporting requirements of federal securities laws. True or False
Q:
When the borrower engages in activities that make it less likely that the loan will be repaid, ________ is said to exist.
A) asymmetric information
B) adverse selection
C) moral hazard
D) fraud
Q:
When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.
A) asymmetric information
B) adverse selection
C) moral hazard
D) fraud
Q:
Mergers and acquisitions are subject to federal regulation only. True or False
Q:
When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.
A) asymmetric information
B) adverse selection
C) moral hazard
D) fraud
Q:
The U.S. Securities Act of 1933 requires that all securities offered to the public must be registered with the government. True or False
Q:
The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.
A) noncollateralized risk
B) free-riding
C) asymmetric information
D) costly state verification
Q:
Foreign competitors are not relevant to antitrust regulators when trying to determine if a merger of two domestic firms would create excessive pricing power. True or False
Q:
Through risk-sharing activities, a financial intermediary ________ its own risk and ________ the risks of its customers.
A) reduces; increases
B) increases; reduces
C) reduces; reduces
D) increases; increases
Q:
A typical consent decree for firms involved in a merger requires the merging parties to divest overlapping businesses or to restrict anticompetitive practices. True or False
Q:
An investor who puts all her funds into one asset ________ her portfolio's ________.
A) increases; diversification
B) decreases; diversification
C) increases; average return
D) decreases; average return
Q:
Federal antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for any significant competitor reaction. True or False
Q:
The purpose of diversification is to
A) reduce the volatility of a portfolio's return.
B) raise the volatility of a portfolio's return.
C) reduce the average return on a portfolio.
D) raise the average return on a portfolio.
Q:
The primary reason the Sarbanes-Oxly Act of 2002 was passed was to eliminate insider trading. True or False
Q:
Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of
A) poorly informed consumers.
B) standardization.
C) economies of scale.
D) their market power.
Q:
The presence of transaction costs in financial markets explains, in part, why
A) financial intermediaries and indirect finance play such an important role in financial markets.
B) equity and bond financing play such an important role in financial markets.
C) corporations get more funds through equity financing than they get from financial intermediaries.
D) direct financing is more important than indirect financing as a source of funds.
Q:
Insider trading involves buying or selling securities based on knowledge not available to the general public. True or False
Q:
Would you anticipate continued consolidation in the global pharmaceutical industry? Why or why not?
Q:
The main sources of financing for businesses, in order of importance, are
A) financial intermediaries, issuing bonds, issuing stocks.
B) issuing bonds, issuing stocks, financial intermediaries.
C) issuing stocks, issuing bonds, financial intermediaries.
D) issuing stocks, financial intermediaries, issuing bonds.
Q:
In your opinion, is this transaction likely to succeed or fail to meet investor expectations? Explain your answer.
Q:
Financial intermediaries
A) exist because there are substantial information and transaction costs in the economy.
B) improve the lot of the small saver.
C) are involved in the process of indirect finance.
D) do all of the above.
E) do only A and B of the above.
Q:
Why do you think Pfizers stock initially fell and Pharmacias increased?
Q:
Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as
A) foreign bonds.
B) Eurobonds.
C) Eurocurrencies.
D) Eurodollars.
Q:
In your judgment, what were the primary motivations for Pfizer wanting to acquire Pharmacia? Categorize these in terms of the primary motivations for mergers and acquisitions discussed in this chapter.
Q:
Bonds that are sold in a foreign country and are denominated in that country's currency are known as
A) foreign bonds.
B) Eurobonds.
C) Eurocurrencies.
D) Eurodollars.
Q:
Which of the following markets is sometimes organized as an over-the-counter market?
A) The stock market
B) The bond market
C) The foreign exchange market
D) The federal funds market
E) all of the above
Q:
Why could Gores Technology do in a matter of weeks what the behemoth toy company, Mattel, could not do?
Q:
Which of the following statements about financial markets and securities are true?
A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years.
B) A corporation acquires new funds only when its securities are sold in the primary market.
C) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
Which of the following statements about financial markets and securities are true?
A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants.
B) A debt instrument is intermediate term if its maturity is less than one year.
C) A debt instrument is long term if its maturity is ten years or longer.
D) The maturity of a debt instrument is the time (term) that has elapsed since it was issued.
Q:
Was this related or unrelated diversification for Mattel? How might this have influenced the outcome?
Q:
Why did Mattel disregard the warning signs uncovered during due diligence? Identify which motives for
Q:
Which of the following statements about financial markets and securities are true?
A) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange.
B) A corporation acquires new funds only when its securities are sold in the primary market.
C) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
An important financial institution that assists in the initial sale of securities in the primary market is the
A) investment bank.
B) commercial bank.
C) stock exchange.
D) brokerage house.
Q:
What would be an appropriate arbitrage strategy for this all-stock transaction?
Q:
Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called
A) investment bankers.
B) traders.
C) brokers.
D) dealers.
E) none of the above.
Q:
What are some of the reasons AOL Time Warner may fail to satisfy investor expectations?
Q:
Intermediaries who are agents of investors and match buyers with sellers of securities are called
A) investment bankers.
B) traders.
C) brokers.
D) dealers.
E) none of the above.
Q:
Would you classify this business combination as a horizontal, vertical, or conglomerate transaction? Explain your answer.
Q:
A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.
Q:
Although the AOL-Time Warner deal is referred to as an acquisition in the case, why is it technically more correct to refer to it as a consolidation? Explain your answer.
Q:
Which of the following are secondary markets?
A) The New York Stock Exchange
B) The U.S. government bond market
C) The over-the-counter stock market
D) The options markets
E) All of the above
Q:
What were the primary motives for this transaction? How would you categorize them in terms of the historical motives for mergers and acquisitions discussed in this chapter?
Q:
In what ways might Warren Buffet use financial synergy to grow Berkshire Hathaway? Explain your answer.
Q:
Which of the following are primary markets?
A) The New York Stock Exchange
B) The U.S. government bond market
C) The over-the-counter stock market
D) The options markets
E) None of the above
Q:
Long-term debt and equity instruments are traded in the ________ market.
A) primary
B) secondary
C) capital
D) money
Q:
To what do you attribute Warren Buffets long-term success?
Q:
The money market is the market in which ________ are traded.
A) new issues of securities
B) previously issued securities
C) short-term debt instruments
D) long-term debt and equity instruments
Q:
Explain some of the obstacles that P&G and Gillette are likely to face in integrating the two businesses. Be specific. How would you overcome these obstacles?
Q:
Which of the following statements about the characteristics of debt and equity are true?
A) They both can be long-term financial instruments.
B) They both involve a claim on the issuer's income.
C) They both enable a corporation to raise funds.
D) All of the above.
E) Only A and B of the above.
Q:
Explain how actions required by antitrust regulators may hurt P&Gs ability to realize anticipated synergy. Be specific.
Q:
Which of the following are securities?
A) A certificate of deposit
B) A share of Texaco common stock
C) A Treasury bill
D) All of the above
E) Only A and B of the above
Q:
P&G announced that it would be buying back $18 to $22 billion of its stock over the eighteen months following closing. Much of the cash required to repurchase these shares requires significant new borrowing by the new companies. Explain what P&Gs objective may have been trying to achieve in deciding to repurchase stock? Explain how the incremental borrowing help or hurt P&G achieve their objectives?
Q:
A country whose financial markets function poorly is likely to
A) efficiently allocate its capital resources.
B) enjoy high productivity.
C) experience economic hardship and financial crises.
D) increase its standard of living.
Q:
Immediately following the announcement, P&Gs share price dropped by 2 percent and Gillettes share price rose by 13 percent. Explain why this may have happened?
Q:
Financial markets improve economic welfare because
A) they allow funds to move from those without productive investment opportunities to those who have such opportunities.
B) they allow consumers to time their purchases better.
C) they weed out inefficient firms.
D) they do all of the above.
E) they do A and B of the above.
Q:
What are the motives for the deal? Discuss the logic underlying each motive you identify.
Q:
Which of the following can be described as involving indirect finance?
A) A bank buys a U.S. Treasury bill from one of its depositors.
B) A corporation buys commercial paper issued by another corporation.
C) A pension fund manager buys commercial paper in the primary market.
D) Both A and C of the above.
Q:
Is this a horizontal or vertical merger? What is the significance of this distinction? Explain your answer.
Q:
Which of the following can be described as involving indirect finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys commercial paper in a secondary market.
D) All of the above.
E) Only A and B of the above.
Q:
Which of the following can be described as involving direct finance?
A) A corporation's stock is traded in an over-the-counter market.
B) A corporation buys commercial paper issued by another corporation.
C) A pension fund manager buys commercial paper from the issuing corporation.
D) Both A and B of the above.
E) Both B and C of the above.
Q:
Is this deal a merger or a consolidation from a legal standpoint? Explain your answer.
Q:
Which of the following can be described as involving direct finance?
A) A corporation's stock is traded in an over-the-counter market.
B) People buy shares in a mutual fund.
C) A pension fund manager buys commercial paper in the secondary market.
D) An insurance company buys shares of common stock in the over-the-counter markets.
E) None of the above.
Q:
How might the additional product and geographic diversity achieved by combining Mars and Wrigley benefit the combined firms?
Q:
Financial markets have the basic function of
A) bringing together people with funds to lend and people who want to borrow funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) both A and B of the above.
E) both B and C of the above.
Q:
It what way did the acquisition of Wrigleys represent a strategic blow to Cadbury?
Q:
Every financial market performs the following function:
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.
Q:
Why was market share in the confectionery business an important factor in Mars decision to acquire Wrigley?
Q:
If you are planning a vacation to Europe, do you prefer a strong dollar or weak dollar relative to the euro? Why?
Q:
Based on your answers to questions 1 and 2, do you believe that investors reacted correctly or incorrectly to the announcement of the transaction?
Q:
What is the central bank and what does it do?
Q:
How are Xerox and ACS similar and how are they different? In what way will their similarities and differences help or hurt the long-term success of the merger?
Q:
Why is the stock market so important to individuals, firms, and the economy?
Q:
Discuss the advantages and disadvantages of Xeroxs intention to operate ACS as a standalone business. As an investment banker supporting Xerox, would you have argued in support of integrating ACS immediately, at a later date, or to keep the two businesses separate indefinitely? Explain your answer.
Q:
How does a bond differ from a stock?
Q:
Joes barber shop buys Joses Hair Salon. Which of the following terms best describes this deal?
a. Joint venture
b. Strategic alliance
c. Horizontal
d. Vertical
e. Conglomerate
Q:
What is money?
Q:
A steel maker acquired a coal mining company. Which of the following terms best describes this deal?
a. Vertical
b. Conglomerate
c. Horizontal
d. Obtuse
e. Tender offer