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Free CMA Exam Braindumps (page: 137)

Page 137 of 336
PDF with 1336 Questions
View Related Case Study

In general, it is more expensive for a company to finance with equity capital than with debt capital because

  1. Long-term bonds have a maturity date and must therefore be repaid in the future
  2. Investors are exposed to greater risk with equity capital.
  3. Equity capital is in greater demand than debt capital
  4. Dividends fluctuate to a greater extent than interest rates

Answer(s): B

Explanation:

Providers of equity capital are exposed to more risk than are lenders because the firm is not obligated to pay them a return. Also, in case of liquidation, creditors are paid before equity investors. Thus, equity financing is more expensive than debt because equity investors require a higher return to compensate for the greater risk assumed



View Related Case Study

A firm is planning to issue a callable bond with an 8% coupon rate and 10 years to maturity. A straight bond with a similar rate is priced at $1,000. If the value of the issuer's call option is estimated to be $50, what is the value of the callable bond?

  1. $1,000
  2. $950
  3. $1,050
  4. $900

Answer(s): B

Explanation:

A callable bond is not as valuable to an investor as a straight bond. Thus, the $50 call option is subtracted from the $1,000 value of a straight bond to arrive at a $950 value for the callable bond.



View Related Case Study

In capital markets, the primary market is concerned with the provision of new funds for capital investments through

  1. New issues of bond and stock securities.
  2. Exchanges of existing bond and stock securities.
  3. The sale of forward or future commodities contracts
  4. New issues of bond and stock securities and exchanges of existing bond and stock securities

Answer(s): A

Explanation:

The primary market is the market for new stocks and bonds In this market, wherein investment money flows directly to the issuer, securities are initially sold by investment bankers who purchase them from issuers and sell them through an underwriting group. Later transactions occur on securities exchanges or other markets.



View Related Case Study

The term `underwriting spread" refers to the

  1. Commission percentage an investment banker receives for underwriting a security issue.
  2. Discount investment bankers receive on securities they purchase from the issuing company.
  3. Difference between the price the investment banker pays for a new security issue and the price at which the securities are resold.
  4. Commission a broker receives for either buying or selling a security on behalf of an investor.

Answer(s): C

Explanation:

An investment banker performs an underwriting or insurance function when it purchases an issue of securities and then resells them. The risk of price fluctuations during the distribution period is borne entirely by the investment banker. Investment banking is also an efficient vehicle for marketing the securities because investment bankers are specialists in such activities The profit earned is the underwriting spread, or the difference between the purchase and resale prices of the securities (effectively, the wholesale and retail prices).



Page 137 of 336



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