Learning Objective 8-8
1) Risks associated with owning an investment in a company’s stock include the risk that ________.
A) the company will not be successful
B) the company may not be able to buy back the stock when it matures
C) the company will not be able to make regular interest payments to shareholders
D) this particular stock becomes part of a diversified portfolio
2) Mr. Fitch purchased 100 shares of Tommy Hilfiger, Inc.’s common stock for a total of $2,000. Mr. Fitch sells the 100 shares to Mr. Abercrombie for $2,300. This sale will cause Tommy Hilfiger, Inc.’s ________.
A) total assets to decrease
B) total shareholders’ equity to decrease
C) net income to increase
D) This sale has no effect on Tommy Hilfiger’s accounting equation.
3) An investor can reduce the risk of investing in a particular company’s stock by ________.
A) investing in the stock of other companies in other industries
B) buying the same company’s bonds as well as its stock
C) buying additional shares of stock in the same company
D) investing in the stock of other companies in the same industry
4) Which of these can best help shareholders monitor the behavior and decisions of management?
A) the tabloid press
B) internet blogs
C) independent audits
D) frequent unannounced, random personal visits to the company
5) Shareholders purchase stock and assume the business risks associated with the company issuing the stock in exchange for sharing in the potential earnings and growth of the company.
6) The management of Krupt, Inc. decided to buy back 30% of the shares of stock outstanding. What effect would this have on the company’s total assets? Why would management want to do this? Is this ethical?
7) The management of Krupt, Inc. issued two shares of $0.50 par value common stock in exchange for each share of all common shareholder’s $1.00 par value stock. What effect will this have on total shareholders’ equity? What is this practice called? Is this ethical?
8) Discuss the types of business risks associated with equity financing.