LEARN SMART 5,6

CHAPTER 5

 Taking a company private using borrowed money is called a leveraged

buyout.
 Financing for new, often high-risk, companies takes place in the venture
capital (VC) market.
 When a stock hits the trigger price on a standard stop order, the order is
converted to a market order.
 The performance fee earned by a private equity firm is known as carried
interest.
 The IPO prospectus is a document that details information about a
security offering.
 An investor who wishes to specify a price at which a buy or sell order will
be triggered would use a stop order.
 Like hedge funds, Most private equity funds follow a 2/20 fee structure.
 Circuit breakers exist at both the market and individual stock levels
 An investor who wishes to immediately execute a buy or sell at the
current best price would use a market order.
 An investment bank who underwrites an issue by purchasing all the
shares and reselling them to the public is using: firm commitment
underwriting
 A constraint that prevents private equity fund managers from collecting
excessive compensation is a provision clawback.
 NASDAQ market makers trade like NYSE DMMs
 a dealer maintains an inventory of a security and stands ready to buy or
sell.
 Assume you short a stock at $40 per share. You wish to limit your
potential losses, so you wish
to put in a buy order if the price rises to $45. What order type would be
most appropriate?
Stop
 LEARN SMART 5,6

 The electronic trading system currently in use by the NYSE is the

Super Display Book

 Methods used by exchanges to calm markets in the event of a steep

decline are called:
circuit breakers
 Before shares can be sold to the public, the issue must be approved by
the SEC
 Which of the following NYSE participants did not replace the role of
specialists ? floor broker
 NASDAQ market makers trade on an inventory basis and therefore post
bid and ask prices
 An investor who wishes to specify the maximum price she is willing to
pay for a stock would use limit order
 The DJIA (or Dow) tracks the performance of industrial companies from
all developed countries (FALSE ONLY USA COMPANIES).
 With a rights offer follow-on securities are offered only to existing
owners.
 Which of the following is not a secondary market transaction?
Buying new shares from the company
 DJIA is not value-weighted
 The ask price is larger than the bid price
 A broker brings buyers and sellers together but does not maintain an
inventory.
 There are 30 stocks included in the Dow Jones Industrials Average
 The difference between the ask price and the bid price is the spread
 Each venture capital firm generally invests across all stages of firm
development (FALSE) THE ANSWER IS (PARTICUALR STAGES)
 An initial public offering (IPO) is a type of primary market transaction.
 Selling new shares of an already public company is a seasoned equity
offering, also known as a follow-on offering
 The NYSE Arca is the electronic trading engine of the NYSE, also
serving as a fully electronic exchange listing stocks, options, and ETFs.
 would require an adjustment for a stock split? price-weighted
 LEARN SMART 5,6

 Which of the following would not be an example of a security used by

a venture capital firm to minimize risk while still retaining upside?
straight preferred stock
 In investment bank who underwrites an issue by committing to sell as
many shares as possible to the public
(while returning any unsold shares) is using: best efforts underwriting

CHAPTER 6

 Advantages of enterprise ratio over P/E ratio, P/E ratios are impacted
more by differences in leverage
 The dividend discount model values a share of stock as the sum of all
expected future dividend payments.
 The inverse of the P/E ratio is the earnings yield.
 The decomposition of ROE into three components is referred to as the
DuPont formula.
 In the free cash flow model, the discount rate is based on the
asset beta
 Assuming a stock has a supernormal growth period, followed by
constant growth,the H-model assume a linear decline in growth over
the supernormal period.
 Which of the following items would not be used to conduct
fundamental analysis?
historical stock prices

NOTE: fundamental analysis uses (cash flow ,EPS ,Sales)

 The constant perpetual growth model would be most appropriate for
which of the following industries? Utilities
 A stock with a low P/E ratio would be classified as a Value Stock
 Enterprise value includes both debt and equity.
 three components of the DuPont approach to calculating ROE
(equity multiplier , asset turnover , net profit margin)
 LEARN SMART 5,6

 the constant perpetual growth model requires that g < k.

 Fundamental analysis involves examining a firm's accounting
statements and other financial and economic information to assess the
value of a company's stock.
 A firm whose cash flow per share is larger than its earnings per share is
said to have earnings. high-quality
 The model used to estimate discount rates is the
CAPM
 Which of the following formulas is the correct estimate for free cash
flow?
FCF = EBIT(1 - t) + depreciation - CAPEX - change in NWC

Assuming a stock has a supernormal growth period, followed by

constant growth, the H-model assume a linear decline in growth over
the supernormal growth. ( True )

 Which of the following is an advantage of the enterprise value ratio

over the P/E ratio?
a. Enterprise value based on book value
b. P/E ratio are used to calculate firm value as opposed to equity value
c. EV is the entire firm
d. P/E ratio are impacted more by differences in leverage

 The two-stage dividend growth model would be appropriate for

estimating the value of an established utilities company . (False)

 Residual income is also known as Economic Valued Added (EVA)

t(True)