FIN 300 Test 3 Study Guide word.docx - FIN 300 Spring 2020 study Guide Test 3 This is a study guide ONLY and is to assist you with test preparation It

FIN 300 Test 3 Study Guide word.docx - FIN 300 Spring 2020...

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FIN 300 Spring 2020 - study Guide - Test # 3 This is a study guide ONLY and is to assist you with test preparation. It does not take the place of reading textbook chapters and items posted on Canvas or attending class (including online classes). It should cover most of the material on the test. However, I reserve the right to ask questions from all material covered in class, assigned as reading, Canvas items, homework and in-class assignments. It'll be multiple choice questions, with general math. Chapter 9 -Stock Valuation -Text book and Power Point Which group owns the largest share (percentage) of corporate equity? What are the two next largest groups of holders? Households hold the largest share of equity securities more than 35% of corporate equity. Pension Funds are the largest institutional investors in equities, followed by mutual funds and foreign investors. Why do many financial analysts treat preferred stock as a special type of bond rather than an equity security? Because of their strong similarity to bonds that many financial analysts treat preferred stocks which are not true perpetuities as a form of debt rather than equity. Stocks are equity securities; they represent certificates of ownership in a corporation Secondary market — What is it, what are two main concepts, and how does it create market efficiency? In an efficient market, stock prices are updated constantly as new information reaches the market and is immediately incorporated into estimates of market values. There are two main concepts 1. The New York Stock Exchange (NYSE) 2. National Association of Securities Dealers Automated Quotation (NASDAQ). *The NASDAQ is larger than the NYSE in terms of number of companies listed and shares traded daily *Most secondary market transactions in the U.S. occur on a stock exchange. Secondary markets differ in the amount of information about prices available to investors, which influences each market’s efficiency There are four types of secondary markets: o Direct search o Broker o Dealer o Auction Broker v. Dealer. What are they and what are the differences? Broker o Brokers earn a fee (commission) for bringing buyers and sellers together o Dealing with buyers and sellers provides brokers with extensive information about prices at which investors are willing to trade shares o A commission that is less than the cost of direct search gives an investor the incentive to pay a broker for price information
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Dealer o Market efficiency is improved if someone provides continuous bidding (selling or buying) for a security so no time is lost searching for a partner o Dealers provide this service by owning inventories of securities from which they buy and sell to earn profit o A dealer has an advantage over a broker because a broker cannot guarantee prompt execution of an order; a dealer holds an inventory of securities and can provide the guarantee o A dealer market eliminates time-consuming searches for a fair deal through immediate sales or purchases using a dealer’s inventory of securities. o
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