Capital Markets and Securities Issuance Homework

Question 1. Multiple Choice Questions

This homework provides useful review exercise for Class #2. Please answer all of the following questions based on your own insights, analyses and applications. This homework will provide useful review and preparation for the Individual Research Assignments. 

1. Which of the following is an example of capital market imperfections: I) Information Asymmetry; II) Agency Problems; III) Taxes; IV) Financial Distress; V) Corporate Governance and Control; VI) Market Inefficiency; VII) Transaction Costs

a. I, II, III, IV, V, VI, and VII 

b. I and II only

c. VI and VII only d. III and IV only 

2. Which of the following is an example of “Primary Market”?

a. Institutional investor sells Goldman Sachs stocks to another institutional investor b. Institutional investor purchases stocks issued directly by Uber

c. Individual investor purchases Tesla stocks from an institutional investor

d. Individual investor purchases Nike stocks from another individual investor 

3. Which of the following is an example of “Secondary Market”?

a. Institutional investor purchases Zoom stocks from another institutional investor b. Individual investor purchases Amazon stocks from an institutional investor

c. Institutional investor sells PG&E stocks to another institutional investor

d. All of the above 

4. Which of the following is an example of how firms issue securities: I) Public equity and Initial Public Offering (IPO); II) Crowdfunding; III) Private equity and Venture Capital; IV) Private placements. (hint: see Class #1 presentation)

a. III and IV only 

b. I only

c. I, II, III, and IV d. I and III only 

5. Which of the following is correct? (hint: see Class #1 presentation)

a. Private placement is issuing of securities to a limited number of investors without public offering

b. Crowdfunding is issuing of securities to a large number of investors through public platforms such as internets

c. Seasoned offering is issuing of additional securities by a firm that is already publicly traded

d. All of the above 

6. Which of the following is the benefit of Staged Financing? a. Providing financing flexibility for growth options

b. Reducing risk and uncertainty of investments

c. Reducing information asymmetry 

d. All of the above 

7. Venture Capital (VC) financing can provide:

a. Monitoring, governance, and control

b. Communication and certification to outside investors c. Strategic advice and inputs to corporate strategy

d. All of the above 

8. Zero-stage financing of a startup firm involves: I) Public equity from IPO; II) Saving and personal loans by the entrepreneur (founder); III) Private equity from Venture Capital a. I only

1. Which of the following is an example of capital market imperfections...

b. III only

c. II only

d. I, II, and III 

9. Which of the following is often found in the liabilities of the balance sheet model during First-stage financing: I) Public equity from IPO; II) Long-term debt from banks; III) New equity from Venture Capital; IV) Original equity from entrepreneur (founder). a. I only

b. I, II, III, and IV

c. IV only

d. III and IV only 

10. Based on the framework of firm-cycle, which of the following is the least transparent to outside investors?

a. IPO firm

b. Post-IPO Mature firm 

c. Post-IPO growth firm d. Pre-IPO Startup firm 

11. Which of the following statement is true?

a. Debt and equity are identical contingent claims based on firm value b. Debt has liquidation value if the firm is in insolvency

c. Equity pays dividends if the firm is in insolvency

d. All of the above 

12. Which of the following is a limitation of financial statements: I) Snapshot in nature; II) Subject to manipulation; III) Backward-looking; IV) Incomplete information about firm value

a. II and IV only 

b. III only

c. I, II, III, and IV d. IV only 

13. Which of the following is an objective of Financial Analysis?

a. Reduce information asymmetry between managers and outside investors

b. Improve information transparency regarding the firm value and performance

c. Transform imperfect information of financial statements into informative signals for valuation

d. All of the above 

Question 14 below is based on the following information: 

14. Given the above information, which of the following is the correct result of External Financing Needs?

a. 30

b. 30 

c.230

d.0

Step (i) Compute the Sustainable Growth Rate based on the following information of BlackRock Inc (ticker: BLK) in fiscal year 2019: 

Note: Plowback ratio = (1  Payout ratio)

Hint: review Section 5, p. 9 of Class #2 presentation. 

Sustainable Growth Rate = Plowback ratio * Return on Equity = (1 – Payout ratio) * Return on Equity 

Step (ii) Provide interpretation of your computed Sustainable Growth Rate. 

Applications of Equity Research (Individual Research Assignment – Part I): 

Answer the following two steps to compute and interpret Sustainable Growth Rate for the company you have chosen for Individual Research Assignment – Part I. 

Step (i) Compute the Sustainable Growth Rate for the company you have selected for your equity research. Present the source of information and all steps of your calculation. 

Hint: review Section 5, p. 9 of Class #2 presentation. 

Sustainable Growth Rate = (1 – Payout ratio) * Return on Equity 

Step (ii) Provide interpretation of your computed Sustainable Growth Rate. 

Applications of Financial Analyses and Individual Research Assignment – Part II StockTrak Simulation: Based on your original research and analyses, discuss Two (2) examples of stock trades (either “Buy/Long” position or “Sell/Short” position) performed in our StockTrak simulation game. 

1.Suggestion #1: Perform stock trades in our StockTrak simulation based on your own insight, analyses, and applications of corporate finance theories. Your stock trades should be supported by financial information/data, financial analyses, and/or applications of corporate finance theories (e.g., capital market imperfections). You may try long-buying or short-selling positions in your trading strategies. You may also consider equity selection based on different firm types and different industries. 

2.Suggestion #2: It will be useful to consider stock trades based on corporate finance news, announcements, or events. In your examples of stock trades, discuss the timing of your trades (e.g., during corporate finance news, announcements, or events).