Corporate Finance Final

1. Receivables period equals ____ days divided by the receivable's turnover.

365

1. The payables period equals _____ days divided by the payables turnover.

365

1. The costs of financial distress depend mostly on how easily the ownership of the firm's _____ can be transferred.

Assets

1. Which costs of financial distress are easier to measure?

Direct costs

1. Which two of the following are broad types of costs of financial distress?

Direct costs Indirect costs

1. Which of the following industries tend to have low leverage?

Drugs Computers

1. Based on MM Proposition I, even including taxes, capital structure does not matter to the firm.

False

1. Holding equity in an unlevered firm has no risk

False

The legal process of bankruptcy is typically quick and inexpensive.

False

1. The equity risk that comes from the financial policy of capital structure decisions of the firm is known as:

Financial risk

1. Equity carries risk thus an investor should expect a _____ return than that on less risky debt.

Higher

An individual can duplicate a levered firm through a strategy called ______ leverage where the investor uses his own funds plus borrowed funds to buy stocks.

Homemade

1. With ____ ____, an investor is able to replicate a corporation's capital structure by borrowing funds and using those funds along with their own money to buy the company's stock.

Homemade leverage

If the degree of leverage increases, the cost of debt will___.

Increase

1. What are some examples of indirect financial distress costs?

Lost reputation Lost sales

The present value of the interest tax shield equals what?

TC x D

A beneficial rule to follow is to set the firm's capital structure so that ___.

The firm's value is maximized

The Static Theory of Capital Structure suggest employing debt to the point that its cost equals the cost of ______.

The increased probability of bankruptcy

1. According to the absolute priority rule, administrative expenses associated with the bankruptcy are paid first in the distribution of the proceeds of liquidation

True

1. Firm value is maximized when the WACC is minimized.

True

1. The gap between short-term outflows and inflows can be filled by holding a liquidity reserve.

True

1. Current assets are cash and other assets that will be turned into cash within ___.

a year

1. Which one the followings is the operating cycle in order from first to last. 1. Sell the finished product, 2. Order inventory, and 3. Collect cash from the sale

a. 2, 1, 3

1. Which answer is correct in order of priority of payment: 1) Payment to common shareholders 2) Bankruptcy administrative expenses 3) Consumer claims 4) Wages, salaries, and commissions?

a. 2,4,3,1 b. Bankruptcy administrative expenses c. Wages, salaries, and commissions d. Consumer claims e. Payment to common shareholders

1. An investor who invests in the stock of a levered firm rather than in an all equity firm will require _____.

a. A higher expected return

1. A flexible short-term financing strategy implies surplus cash and little borrowing, but the advantage of such a strategy is:

a. A reduced probability of financial distress

1. Although flexible short-term financial policies are more costly, they result in ____.

a. A reduced probability of financial distress

1. A restrictive short-term financing strategy implies ___.

a. A small investment in net working capital b. Possible cash shortages

1. Which of the following are generally used as security for short-term secured loans?

a. Accounts receivable b. Inventory

1. The operating cycle is composed of which periods?

a. Accounts receivable period b. Inventory period

1. Non-committed lines of credit ____.

a. Are informal arrangements b. Generally specify a maximum amount that can be borrowed

1. The fact that failure to meet debt obligations can result in bankruptcy is ____.

a. Bad for the firm

1. Short-term finance is concerned with current assets and current liabilities, whereas long-term finance is concerned with ____.

a. Capital budgeting b. Dividend policy c. Capital structure

1. Which of the following are examples of cash disbursements?

a. Capital expenditures b. Payments of accounts payable c. Wages and taxes

1. A corporation gains no value from an interest tax shield if which of the following are true?

a. Corporate tax rates are zero b. The corporation is an all-equity firm. c. The corporation has no debt

1. What does a receivables turnover ratio of 57 mean?

a. Customers took, on average, 57 days to pay.

1. According to MM Proposition I, a firm's capital structure choices:

a. Do not affect the value of the firm

1. When total book liabilities exceed the book value of the total assets, a firm is said to have reached fallen angel insolvency.

a. False

1. An investor who buys the common stock of levered firm is subject to more risk due to the addition of

a. Financial risk

1. What does maturity hedging involve?

a. Financing fixed assets with long-term financing and inventories with short-term financing

1. Uses of cash can involve increasing a ____ account.

a. Fixed asset b. Noncash current asset

1. Short-term cash flows are uncertain because ____.

a. Future sales and costs cannot be precisely predicted

1. The tax deductibility of interest payments is?

a. Good for the firm

1. Customers refusing to buy GM cars when the company filed for Chapter 11 for fear of not being able to get service for the cars in the future is an example of ___ costs of financial distress.

a. Indirect

1. Which of the two types of costs of bankruptcy are more difficult to quantify?

a. Indirect costs

1. Which of the following assumptions is necessary for MM Proposition I to hold?

a. Individuals can borrow on their own at an interest rate equal to that of the firm

1. For US corporations, current assets have fallen from 50% of total assets in the 1960's to 40% of total assets today primarily because of more efficient:

a. Inventory management b. Cash management

1. Which of the following is true of the impact of financial leverage?

a. It magnifies gains and losses

1. Which of the following are generally true about the cost of equity and the cost of debt?

a. The cost of equity may increase with leverage b. The cost of debt is generally lower than the cost of equity c. The cost of debt increases with leverage

1. A firm's capital structure refers to____.

a. The firm's mix debt and equity

1. Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings (EBIT)?

a. The rate of return on assets is unaffected by leverage.

1. Other important sources of short-term financing besides secured and unsecured borrowing for a company are:

a. Trade credit b. Commercial paper

1. What is the primary duty as payables manager?

account payables

1. The cash cycle is equal to the operating cycle minus the ____ period.

accounts payable

1. The time it takes to collect on the sale of a product is called the ____.

accounts receivable period

1. The optimal balance of current ____ occurs where the sum of the carrying costs and the shortage costs is at a minimum.

assets

1. The opportunity costs of holding current assets are called _____ costs.

carrying

1. The primary tool in short-term financing planning is the ___.

cash budget

1. The difference between the operating cycle and the accounts payable period is the ___.

cash cycle

1. A committed line of credit is a more formal arrangement typically involving a ____.

commitment free

1. Ending accounts receivable equals starting accounts receivable plus _____ minus collections.

credit sales

1. The optimal level of debt in the presence of corporate taxes and bankruptcy costs occurs at the point at which the present value of distress costs ____ the present value of the tax shield benefits.

equals

1. Shortage costs are those that ____ when the level of investment in current assets is high.

fall

1. Based on MM Proposition I, even including taxes, capital structure does not matter to the firm.

false

1. Buying raw materials requires a decision about how cash should be collected.

false

1. Other important sources of short-term financing for a company include short-term stocks.

false

1. The collection cycle is the difference between disbursement and collection of cash.

false

1. The net payments receivable equals the cash collections minus the cash disbursements.

false

1. A short-term financial policy involving a higher proportion of long-term debt than short-term debt is classifies as a _____ policy.

flexible

1. Security for a short-term loans usually consist of accounts receivable, ____, or both.

inventories

1. The time it takes to acquire and sell inventory is called the ____ period.

inventory

1. Firms who attempt to match the maturity of assets and liabilities are said to employ

maturity hedging

1. The possibility of bankruptcy costs has a _____ effect on the value of the firm.

negative

1. The difference between cash collections and cash disbursements is the predicted ____.

net cash inflow

1. The primary concerns for short-term finance are the firm's short run ____ and financing activities.

operating

1. The expected return on equity is ____ to leverage.

positively related

1. A product begins its accounting life as inventory and is converted to a ____ when it is sold on credit.

receivable

1. The main problems with maturity mismatching (financing long-term assets with short-term debt) are that it ____.

requires frequent refinancing is risky

1. Carrying costs ____ with the level of investment in current assets.

rise

1. Unsecured bank loans are:

short-term

1. What decision has to be made when companies sell a product?

should credit be extended?

MM Proposition II shows that___.

the cost of equity rises with leverage

1. A stock-out occurs if a store runs out of inventory and could result in lost customers.

true

1. MM demonstrated that debt financing is neither better nor worse than equity financing

true

1. The cash cycle is equal to the operating cycle minus the accounts payable period.

true

A capital restructuring may include

Issuing more equity Issuing debt and repurchasing equity Issuing more debt

1. There is a precise mathematical equation for determining the optimal level of debt for any firm

a. False

1. Bankruptcy is very valuable because:

a. It can be used strategically to improve a firm's competitive position b. Payments to creditors cease pending the outcome of the bankruptcy process

1. Financial distress can arise in the form of possible:

a. Legal bankruptcy b. Business failure

1. Which of the following are direct costs of financial distress?

a. Legal fees b. Administrative expenses

1. MM Proposition I does not work with corporate taxes because:

a. Levered firms pay lower taxes than unlevered firms

1. The difference between the ____ cycle and the accounts payable period is the ____ cycle.

a. Operating b. Cash

1. The value of a levered firm in MM Proposition I with corporate taxes equals the value of an all-equity firm:

a. Plus the tax rate times the value of debt

1. Either stock-out or cash-out costs occur when a firm____.

a. Runs out of inventory to sell b. Runs out of available cash

1. The financing of current assets is measured by the proportion of:

a. Short-term debt and long-term debt used to finance current assets

1. How does the level of debt affect the weighted average cost of capital (WACC)?

a. The WACC initially falls then rises as debt increases.

1. Which short-term financial managers are involved with selling on credit and are directly responsible to the vice president of finance?

a. The controller b. The credit manager

1. The idea that a firm borrows to the point that the tax benefit of debt is exactly equal to the increased probability of financial distress is called the _____ theory of capital structure.

a. Trade-off

1. It is possible for the present value of distress costs to exceed the present value of tax savings.

a. True

1. What is the expression for the value of a levered firm in the presence of corporate taxes?

a. Value of Levered Firm (VL) = Value of Unlevered Firm (VU) + Tax Benefit of Debt