Exam 2: The Financial Market Environment

Primary and secondary markets are markets for short-term and long-term securities, respectively.

Corporation A owns 15 percent of the stock of corporation B. Corporation B pays corporation A $100,000 in dividends in 2002. Corporation A must pay tax on ________.

Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax rate for Jennings, Inc.?

Commercial banks advise firms on major transactions such as mergers or financial restructurings.

Money markets involve the trading of securities with maturities of one year or less.

Government is typically a ________.

Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to have earnings before interest and taxes of $100,000 during the coming year. In addition, Go Debt is expected to incur $40,000 in interest expenses as a result of its borrowings whereas No Debt will incur no interest expense because it does not use debt financing. However, No Debt will have to pay stockholders $40,000 in dividend income. Both firms are in the 40 percent tax bracket. Calculate the Earnings after tax for both firms. Which firm has the higher after-tax earnings? Which firm appears to have the higher cash flow? How do you account for the difference?

Apex Inc. issues a bond of $1,000 which pays interest semiannually at a coupon interest rate of 8%. The maturity of the bond is 15 years. Where should this bond be traded?

The key securities traded in the capital markets are ________.

Which of the following serves as an intermediary channeling the savings of individuals, businesses, and governments into loans and investments?

By definition, the money market involves the buying and selling of ________.

Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to ________.

Which of the following acts regulates the primary market in which securities are originally issued to the public?

The sale of a new security directly to an investor or a group of investors is called ________.

Which of the following is true of preferred stock?

Which of the following assists companies in raising capital, advise firms on major transactions such as mergers or financial restructuring, and engage in trading and market making activities?

The over-the-counter (OTC) market is ________.

Which of the following is true of a securities exchange?

The tax liability of a corporation with ordinary income of $1,100,000 is ________. Range of taxable income Marginal rate $ 0 to $ 50,000 15% 50,000 to 75,000 25 75,000 to 100,000 34 100,000 to 335,000 39 335,000 to 10,000,000 34 10,000,000 to 15,000,000 35

Which of the following is an example of marketable securities?