Corporate Finance Exam 3 Written

Which type of investor is more likely to prefer a high dividend payout

Corporations

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt

The Clientele Effect

Argument that stocks attract particular groups based on dividend yield and the resulting tax effects

Optimal Capital structure is achieved when

D/E ratio results in the lowest possible WACC

On the _________ the market value of the stock will decrease by roughly the aftertax value of the dividend

Ex-Dividend Date

(T/F) The tax on capital gains is deferred until the gain is realized favors a high divdend policy

False, Favors a low dividend policy

pecking order theory

Internal Funds Debt Funding Equity funding

According to ________ the cost of equity is directly and propotionally related to capital structure

MM Prop II

According to the _______, the cost of equity capital is directly and proportionally related to capital structure

MM Proposition 2

According to ________, the value of a company is unrelated to its capital structure

MM1 No tax

Hasan Electric declared a dividend on Monday, October 18. Paid on Nov 15, and shareholders of record on October 29, When is the ex-dividend date?

October 28th

A(n) _____ dividend is considered to be a one-time event that will not be repeated.

Special

Capital strucutre - the mixture of debt and equity is a

True

The last date that you can purchase shares of stock and still receive the next dividend is the date that is ______ days before the prior date of record

Two Days

MM Prop 1

WACC decreases as the debt-equity ratio increases

MM Prop 1 with tax

WACC decreases as the debt-equity ratio increases

Value of a firm is maximized when the

WACC is minimized

Financial Risk is dependent on

a company current capital structure

MM Prop II no tax

a company's cost of equity is a linear function with a slope equal to (Ra-Rd)

Chapter 7 Bankruptcy

a trustee will assume control of the company's assets until those assets can be liquidated

The absolute priority rule

determines which parties receive payment first in a bankruptcy proceeding

The explicit costs, such as legal and admisintrative expenses, associated with corporate default are classified as _________

direct bankruptcy costs

In an effort to avoid bankruptcy a firm may incur costs called ________

indirect bankruptcy costs

Bankruptcy

is a legal proceeding

A company is technically insolvent when

it is unable to meet its financial obligations.

The optimal capital structure

maxmizes shareholder value

The capital structure that maximizes the value of a company also

minimizes the cost of capital

According to _________ a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs

static theory of capital structure

Business Risk

the type of equity risk is most related to the daily operations of a firm

MM Prop 1 no tax claims that

the value of a company is unrelated to its capital structure

In general the capital structures of US firms

vary significantly across industries.