Corp Fin

Bankruptcy

A legal process to get out of debt when you can no longer make all your required payments

Seasoned Equity Offering (SEO)

A new equity issue of securities by a company that has previously issued securities to the public

right offer

A public issue of securities in which securities are first offered to existing shareholders (also called a rights offering).

Which one of the following is an underlying assumption of the dividend growth model?

A stock's value is equal to the discounted present value of the future cash flows which it generates.

Which of the following choices best describes the role of taxes on the after-tax cost of capital in the U.S. from the different capital sources?

Common equity-No effect Preferred equity-No effect Debt-Decrease

term loan

Direct business loans of typically 1-5 years

Which of the following statements are correct in relation to M&M Proposition II with no taxes? I. The return on assets is equal to the weighted average cost of capital. II. Financial risk is determined by the debt-equity ratio. III. Financial risk determines the return on assets. IV. The cost of equity declines when the amount of leverage used by a firm rises.

I and II only

Shelf Registration

Registration permitted by SEC Rule 415, which allows a company to register all issues it expects to sell within two years at one time, with subsequent sales at any time within those two years

ex-rights date

The beginning of the period when stock is sold without a recently declared right, normally two trading days before the holder-of-record date

Dutch Auction Underwriting

The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

syndicate

a group of underwriters formed to share the risk and to help sell an issue

prospectus

a legal document describing details of the issuing corporation and the proposed offering to potential investors

Red Herring

a preliminary prospectus distributed to prospective investors in a new issue of securities

oversubscribed privilege

a privilege that allows shareholders to purchase unsubscribed shares in a right offering at sub price

registration statement

a statement filed with the SEC that discloses all material information concerning the corporation making a public offering

Regulation A

an SEC regulation that exempts public issues of less than $5 million from most registration requirements

tombstone

an advertisement announcing a public offering

standby fee

an amount paid to an underwriter participating in a standby underwriting agreement

All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line (CAPM) approach? Assume the firm currently pays an annual dividend of $2.10 a share and has a beta of 1.1.

an increase in the market rate of return

general cash offer

an issue of securities offered for sale to the general public on a cash basis

The capital structure that maximizes the value of a firm also:

minimizes the cost of capital.

intial public offering

company's first equity issue is made available to the public. also called an unseasoned new issue or an IPO

gross spread

compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price

Assume that a company has equal amounts of debt, common stock, and preferred stock. An increase in the corporate tax rate of a firm will cause its weighted average cost of capital (WACC) to:

fall.

reorganization

financial restructuring of a failing firm to attempt to continue operations as a going concern

venture capital

financing for new, often high-risk ventures

underwriters

investment firms that act as intermediaries between a company selling securities and the investing public

private placement

loans (usually long term) provide directly by a limited number of investors.

Dilution

loss in existing shareholders' value in terms of ownership, market value, book value, or EPS

liquidation

termination of the firm as a going concern

unlevered cost of capital

the cost of capital for a firm that has no debt

indirect bankruptcy costs

the costs of avoiding a bankruptcy filing incurred by a financially distressed firm

direct bankruptcy costs

the costs that are directly associated with bankruptcy, such as legal and administrative expenses

Holder-of-record date

the date on which existing shareholders on company records are designated as the recipients of stock rights, also, the date of record.

financial distress costs

the direct and indirect costs associated with going bankrupt or experiencing financial distress

financial risk

the equity risk that comes from the financial policy (the capital structure) of the firm

Business Risk

the equity risk that comes from the nature of the firm's operating activities

When calculating the weighted average cost of capital (WACC) an adjustment is made for taxes because:

the interest on debt is tax deductible.

M&M Proposition II

the proposition that a firm's cost of equity capital is a positive linear function of the firm's capital structure

M&M Proposition I

the proposition that the value of the firm is independent of the firm's capital structure

absolute priority rule

the rule establishing priority of claims in liquidation

interest tax shield

the tax saving attained by a firm from interest expense

Static Theory of Capital Structure

the theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress

firm commitment underwriting

the type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares

Best Offering Underwriting

the type of underwriting in which the underwriter sell as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

homemade leverage

the use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed

stand-by underwriting

type of underwriting in which the underwriter agrees to purchase the unsubscribed portion of the issue