1. Standard & Poors is in the business of rating corporate bonds. These ratings are very important to corporations because they provide a guide to the investing public as to the credit worthiness of the bond. During the financial crisis, this agency, and others, were accused of not being independent. Why would this charge have been leveled against them?

1. All public companies typically had at least one person from a rating agency on their Board
2. The rating agencies were getting a kickback from public accounting firms to send business their way.
3. At one time, all the rating agencies were under the control of the federal government. Since the govt did not want to pay high interest rates they coerced these agencies to provide BBB ratings.
4. The issuing company (i.e. IBM in the case of an IBM corporate bond) were paying the rating agencies for their services. Clearly a conflict of interest.

2. In 2006 housing prices hit their peak. What happened then?

1. The government began purchasing homes under the umbrella of Fannie Mae
2. Because prices had peaked homes became more valuable and homeowners borrowed more
3. Demand had exceeded supply so naturally prices went back up.
4. There was a glut of vacant homes around the country and the values of all homes started to decline.

3. Assume the following about a company; (1). The original IPO (There have been no subsequent stock issues) yielded $4,000,000, (2). Since its organization, the company has produced profits of $3,500,000 and (3) three years ago, for the first time in its existence, they paid dividends of $400,000. However, profits for the last two years have not been large enough to justify paying dividends, but the Board authorized the repurchase and retirement of $750,000 of stock. Based on the above, would be the resulting balance in the Stockholders Equity section of the balance sheet?

1. $6,350,000
2. $7,850,000
3. $8,650,000
4. $8,500,000
5. Not enough information. You would need to know the original purchase price of the Treasury Stock.

4. Assume you are the CFO of a large publicly traded company that must handle a large quantity of highly poisonous and volatile materials. The company has experienced rapid growth over the last few years and now, because of overly favorable terms with customers, often finds itself in need of cash. How should the company go about financing the periodic cash shortfalls?

1. They would borrow short term, such as a line of credit,
2. They would trade stock with the bank to avoid depleting their cash reserves
3. They would borrow long term to match the nature of the assets being purchased so as not negatively impact their current ratio.
4. They would have difficulty obtaining funds because of the high price of government compliance.