Advanced Corporate Finance Test 1
M&M Proposition II, without taxes, is the proposition that:
A company's cost of equity is a linear function with a slope equal to (RA − RD).
Which one of the following statements related to cash dividends is correct?
A dividend is never a liability of the issuer until it has been declared
Underwriters generally:
Accept the risk of selling the new securities in exchange for the gross spread.
The dividend market is in equilibrium when:
All clienteles are satisfied
Delaney purchased 500 shares of Upriver Tours stock on Wednesday, July 7. Edward purchased 100 shares of Upriver Tours stock on Thursday, July 8. Upriver Tours declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information?
Both Edward and Delaney are entitled to the dividend.
Which one of the following statements is correct?
Dividend payments are highly concentrated in a relatively small set of large companies
Globe Hotels has more cash on hand than is required to support its operations. Accordingly, the company has decided to pay out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders called?
Dividends
Which one of the following statements appears to be supported by the current dividend policies of U.S. industrial firms?
Dividends are still viewed by shareholders as a signal of a company's future outlook
Which one of the following statements concerning venture capitalists is correct?
Exit strategy is a key consideration when selecting a venture capitalist.
M&M Proposition II with taxes:
Has the same general implications as M&M Proposition II without taxes.
Homemade leverage is employed when a(n) ________:
Investor uses debt to change his or her exposure to financial leverage.
The business risk of a company:
Is positively related to the company's cost of equity.
The concept of homemade leverage is most associated with:
M&M Proposition I with no tax.
According to ________, the value of a company is unrelated to its capital structure.
M&M Proposition I, no tax
When is the Date of Record?
One day after the ex dividend date. The shareholders of the company on the date of record will be eligible to receive the dividend
Financing of new, nonpublic companies is broadly referred to as ________ financing.
Private equity
Fatou currently owns 2,500 shares of Mariner, Incorporated. She has just been offered the opportunity to purchase additional shares in the company, prior to the shares being offered to the general public. What is this type of an offer called?
Rights offer
What is a seasoned equity offering?
Sale of newly issued equity shares by a publicly owned company
The present value of the interest tax shield is expressed as:
TCD.
What is the information content effect?
The financial market's reaction to a change in the amount of a company's dividend
The interest tax shield is a key reason why:
The net cost of debt is generally less than the cost of equity.
M&M Proposition I with taxes is based on the concept that:
The value of a taxable company increases as the level of debt increases.
M&M Proposition I with tax implies that the:
Weighted average cost of capital decreases as the debt-equity ratio increases.
The existence of ________ makes the capital structure of a company irrelevant.
homemade leverage
The common stock of Battle Gaming has historically had a low dividend yield, and that circumstance is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to as the _____ effect.
Clientele
Financial risk is:
Dependent upon a company's capital structure
Shivani owns 300 shares of Dunning Streetwear, Incorporated. She has opted not to participate in the current rights offering by this company. As a result, Shivani will most likely experience:
Dilution.
