Exam 3 SmartBook Questions

CH15 Whether a firm obtains capital by debt or equity financing depends on _____.

- size of the firm - life-cycle stage - growth prospects

CH14 To estimate the expected return on a risky asset, we need to know the ___.

-market risk premium -risk-free rate -stock's beta

CH13 The risk-free asset has a beta of _____.

0

CH12 Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums.

1. Small-company common stock 2. Long-term corporate bonds 3. US Treasury Bills

CH16 Rank each of the following in order of priority payment starting with the highest priority item to lowest priority item.

1. bankruptcy administrative expenses 2. wages, salaries, and commissions 3. consumer claims 4. payment to common shareholders

CH12 A projected IRR on a risky investment in the _____ percent range is not unusual.

10 to 20

CH13 The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio?

12.9% 10.9%

CH12 Based on average historical returns shown in the text, small-company stocks increased in value by _____ percent in a typical year.

16

CH16 According to the Tax Cuts and Jobs Act of 2017, after 2021, the net interest deduction drops to what percent of EBIT?

30

CH12 During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.

37

CH16 In 2019, the net interest deduction is limited to what percent of EBITDA?

50

CH14 WACC was used to compute the following project NPVs: Project A = $100, Project B = -$50, Project C = -$10, Project D = $40. Which projects should the firm accept?

A and D

CH12 More volatility in returns produces ______ difference between the arithmetic and geometric averages.

A larger

CH16 Which of the following is not a possible cause of financial distress?

Accounting regression

CH16 Which of the following industries tend to have a high leverage?

Airlines Cable television

CH12 If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

An efficient market reaction

CH13 Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose?

Asset A

CH16 Financial distress can arise in the form of possible:

Business failure Legal bankruptcy

CH15 Which is true regarding the difference between competitive and negotiated underwriting?

Competitive underwriting is typically cheaper than negotiated underwriting.

CH14 Which of the following are components used in the construction of the WACC?

Cost of debt Cost of preferred stock Cost of common stock

CH15 The practice of raising small amounts of capital from a large number of people is called _____.

Crowdfunding

CH13 When new securities are added to a portfolio, the total unsystematic risk portion of that portfolio is most likely to _____.

Decrease

CH16 Which two of the following are broad types of costs of financial distress?

Direct costs Indirect costs

CH14 To apply the dividend growth model to a particular stock, you need to assume that the firm's ___ will grow at a constant rate.

Dividend

CH14 What can we say about the dividends paid to common and preferred stockholders?

Dividends to common stockholders are not fixed. Dividends to preferred stockholders are fixed.

CH14 Sigma Corporation consists of two divisions: A and B. Division A is riskier than Division B. If Sigma Corporation uses the firm's overall WACC to evaluate both Divisions' projects, which Division will probably not receive enough resources to fund all of its potentially profitable projects?

Division B

CH15 Dilution refers to a loss in _________ shareholders' value.

Existing

CH16 ______ is the term that describes the capital structure when debt is used to finance assets.

Financial leverage

CH12 Average returns can be calculated using ____ or arithmetic average

Geometric

CH15 A contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price is called a _____ provision.

Green Shoe

CH15 Many startup companies are now choosing to raise funds through a(n) _____ rather than the traditional venture capital methods.

ICO

CH12 An efficient market is one in which any change in available information will be reflected in the company's stock price ___.

Immediately

CH12 Dividends are the ______ component of the total return from investing in a stock.

Income

CH12 Stock prices fluctuate from day to day because of _____.

Information flow

CH15 Crowdfunding typically uses which of the following to raise small amounts of capital from a large number of people?

Internet

CH16 Bankruptcy is very valuable due to which of the following?

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

CH16 Which of the following is not a reason that bankruptcy may be valuable to a company?

It generally instills greater confidence among a firm's main customers.

CH12 Strong form efficiency

It implies that all information of every kind is reflected in stock prices.

CH13 What does the security market line depict?

It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.

CH13 If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM?

It is equal to 0 ( Reason: E(Ri) = Rf +βi(RM - Rf) = Rf → βi= 0 )

CH12 Semistrong form efficiency

It is the most controversial, and all public information is reflected in the stock price.

CH13 What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

CH13 What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future.

CH13 As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

It may eventually be almost totally eliminated. It is likely to decrease

CH12 Weak form efficiency

It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices.

CH15 An agreement in an underwriting contract that prohibits insider shares from being sold immediately following an IPO is called a _______ period.

Lockup

CH16 In the absence of taxes, the value of a firm is the same with debt financing as it is with equity financing because ___.

MM demonstrated that debt financing is neither better nor worse than equity financing in the absence of taxes the asset to be financed is the same

CH16 Why is MM's assertion about the positive relationship between firm value and leverage not observed in the real world?

MM did not consider bankruptcy costs.

CH14 The most appropriate weights to use in the WACC are the ______ weights.

Market value

CH15 _______ value dilution is more important than ______ value dilution.

Market, book

CH16 Based on the static theory, what should the managers attempt to maximize and minimize while developing capital structure policy?

Maximize the tax shield benefit of debt and minimize financial distress costs

CH16 The value of the firm is maximized when the weighted average cost of capital (WACC) is

Minimized

CH16 The value of the firm is maximized when the weighted average cost of capital (WACC) is _____.

Minimized

CH13 There is ______ correlation between the unsystematic risk of two companies from different industries.

No

CH15 Which of the following are true about the venture capital (VC) market?

Personal contacts are important in gaining access to the VC market. Access to venture capital is very limited.

CH13 Asset A has an expected return of 17 percent and standard deviation of 5 percent. Asset B has an expected return of 15 percent and standard deviation of 5 percent. Which asset would a rational investor choose?

Portfolio A

CH16 Under MM Proposition II, a firm's cost of equity capital is ______ related to the firm's debt-equity ratio provided the cost of capital for an all-equity firm exceeds the cost of debt.

Positively

CH14 Other companies that specialize only in projects similar to the project your firm is considering are called ___.

Pure plays

CH16 What is the preferred source of financing for firms according to the pecking-order theory?

Retained earnings, debt, common stock

CH12 The Sharpe ratio measures ___.

Reward to risk

CH12 The second lesson from capital market history is that there is a direct link between

Risk and reward

CH12 The excess return on a risky asset is the difference between the risky return and the ____ rate.

Risk-free

CH12 The ratio is calculated as the risk premium of the asset divided by the standard deviation.

Sharpe

CH12 Geometric averages are ______ arithmetic averages.

Smaller than

CH16 The ______ theory has dominated thinking about capital structure for a long time.

Static

CH15 In a rights offering, when an existing stockholder is notified that they have been given one right for each share of stock owned, they can do which of the following?

Subscribe to the full number of entitled shares Order all the rights to be sold Do nothing and let the rights expire

CH12 Some important characteristics of the normal distribution are that it is:

Symmetrical Bell-shaped

CH13 When an investor is diversified only ________ risk matters.

Systematic

CH13 Which type of risk does not change as we add more securities to a portfolio?

Systematic, or market, risk

CH13 Which type of risk is unaffected by adding securities to a portfolio?

Systemic risk

CH12 The Ibbotson-Sinquefield data show that over the long-term, ___.

T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return small-company stocks had the highest risk level

CH16 Which of the following are nonmarketed claims to the firms cash flows?

Taxes Legal fees

CH12 Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

CH13 Which of the following are examples of information that may impact the risky return of a stock?

The Fed's decision on interest rates at their meeting next week The outcome of an application currently pending with the Food and Drug Administration

CH16 Who is likely to have the most information about a firm's future prospects?

The firms manager

CH12 Which of the following are needed to describe the distribution of stock returns?

The mean return The standard deviation of returns

CH15 The available evidence indicates that there are pronounced cycles in which of the following?

The number of IPOs The degree of IPO underpricing

CH16 Which of the following is likely to be true when a bankruptcy ruling is issued?

The ownership of assets is transferred from the shareholders to the bondholders.

CH16 Which capital structure theory suggests that profitable firms will use less debt?

The pecking order theory

CH14 Which of the following variables is not required to calculate the expected return on a risky asset?

The rate of inflation

CH14 If a firm has two divisions and one division is riskier than the other, what would be the potential result if the firm used its overall WACC to evaluate the projects in both divisions?

The riskier division's projects will typically receive full funding and the less risky division's projects will often be incorrectly rejected.

CH13 To determine whether an investment has a positive NPV, you can compare the expected return on that new investment to what the financial market offers on an investment with _____.

The same beta

CH13 What are the two components of unexpected return (U) in the total return equation?

The unsystematic portion The systematic portion

CH12 The CPI is the most commonly used measure of inflation

True

CH12 The dividend yield is defined as the annual dividend amount divided by the beginning stock price

True

CH12 True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

True

CH13 The cost of capital is the minimum required return on a new investment.

True

CH13 The expected return is the return that an investor will probably earn on a risky asset in the future.

True

CH13 The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is systematic risk

True

CH13 The variance is the squared standard deviation.

True

CH13 The variance of a portfolio isn't generally a simple combination of the variances of the assets in the portfolio.

True

CH13 When we discount an announcement or a news item, we say that it has less of an impact on price because the market already factored it in.

True

CH12 Average returns can be calculated _____.

Two different ways

CH13 The true risk of any investment is the _____ portion.

Unanticipated

CH15 ______ helps new shareholders earn a higher return on the shares they buy.

Underpricing

CH15 Which of the following are costs of issuing new securities?

Underpricing The Green Shoe option The gross spread

CH14 The cost of capital depends on the _____ of funds, not the _____ of funds.

Use, source

CH12 The square of the standard deviation is equal to the ____.

Variance

CH13 The percentage of a portfolio's total value that is invested in a particular asset is the portfolio

Weight

CH14 What does WACC stand for?

Weighted average cost of capital

CH13 If you wish to create a portfolio of stocks, what is the required minimum number of stocks?

You must invest in stocks of more than one corporation.

CH14 If a firm has multiple projects, each project should be discounted using:

a discount rate that commensurates with the project's risk.

CH13 The calculation of a portfolio beta is similar to the calculation of _____.

a portfolio's expected return

CH12 In an efficient market

all investments are zero NPV investments assets are priced at the present value of their future cash flows

CH14 The discount rate for the firm's projects equals the cost of capital for the firm as a whole when ___.

all projects have the same risk as the current firm

CH13 When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market _____.

already knew about most of the news item

CH15 The initial sale of a token on a digital currency platform is called _____.

an initial coin offering

CH16 Stockholders and bondholders _____.

are not the only claimants to the cash flows of the firm

CH15 Dilution of the ownership of existing shareholders can be ______ with a rights offering.

avoided

CH12 The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

CH12 A normal distribution has a ______ shape.

bell

CH15 The subscription price must be (below/above) the market price of the stock in a rights offer

below

CH14 Some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably _____.

better than no risk adjustment

CH16 During bankruptcy, the ownership of the firm's assets is transferred from stockholders to ___.

bondholders

CH16 The equity risk that comes from the nature of a firm's operating activities is known as _____ risk.

business

CH15 A right is basically a ___.

call option

CH16 The main difference between marketed and nonmarketed claims is that marketed claims (can/cannot) be bought and sold in financial markets and nonmarketed claims (can/cannot).

can, cannot

CH15 With the ______ method of selecting a syndicate, the issuing firm offers its securities to the highest bidding underwriter.

competitive offer

CH13 The minimum required return on a new project when its risk is similar to that of projects the firm currently owns is known as the _____.

cost of capital

CH14 The cost of ____ can be observed because it is the interest rate the firm must pay on new loans.

debt

CH16 The value of a firm is equal to the value of its _____.

debt plus equity

CH13 Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio _____.

declines

CH16 The cost of debt will begin to increase as the _____.

degree of leverage increases

CH14 Finding a firm's overall cost of equity is (straightforward/difficult).

difficult

CH15 Private equity firms provide financing for firms that otherwise would have difficulty raising capital such as _____ firms.

distressed closely held private startup

CH16 According to M&M Proposition I, a firm's capital structure choices _____.

do not affect the value of the firm

CH16 According to critics of Modigliani and Miller (M&M), M&M capital structure theory ____.

does not work when real-world issues are factored in

CH16 Which of the following industries tend to have low leverage?

drug

CH14 The most well-known approach to company performance evaluation is the _____ method.

economic value added

CH14 The return an investor in a security receives is ______ the cost of the security to the company that issued it.

equal

CH14 A firm's cost of debt can be ___.

estimated easier than its cost of equity obtained by talking to investment bankers obtained by checking yields on publicly traded bonds.

CH15 A rights offering grants

existing shareholders the right to buy new shares

CH16 Voluntary arrangements to restructure a company's debt to avoid bankruptcy may be beneficial to all involved parties. This may involve _____.

extension or composition

CH12 In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

CH13 True or false: A well-diversified portfolio will eliminate all risks.

false

CH13 True or false: Systematic risk will impact all securities in every portfolio equally.

false

CH13 True or false: The process to calculate a portfolio's beta is opposite of the process to calculate a portfolio's expected return.

false

CH14 True or false: The cost of debt on the market value basis is typically much higher than the cost of debt on the book value basis.

false

CH16 MM's assertion of a positive relationship between firm value and leverage is widely observed in the business world.

false

CH16 True or false: In determining the optimal capital structure, managers should keep in mind that lower effective tax rates lead to greater incentives to borrowing.

false

CH16 True or false: It is easy to measure indirect costs of financial distress.

false

CH16 The equity risk that comes from the financial policy or capital structure decisions of the firm is known as _____ risk.

financial

CH15 A standby underwriting arrangement in conjunction with a rights offering gives the ___.

firm an alternative avenue of sale to ensure the success of the rights offering

CH15 An investment bank that underwrites a security issue by buying the securities for less than the offering price and accepting the risk that the securities won't sell is using the ______ method.

firm commitment

CH15 The costs associated with new issues are known as ___.

flotation costs

CH15 A venture capitalist will most likely experience a big payoff with a successful startup company when the start-up _____.

goes public

CH12 In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.

high, low

CH14 When discounting the cash flows of a project at the WACC to estimate NPV, we need to find an alternative in the financial markets that is _____ as the given project.

in the same risk class

CH16 In the presence of corporate taxes, the tax shield effect of debt will ____ the value of the firm.

increase

CH12 An efficient market is one that fully reflects all available ______.

information

CH15 The first public equity issue made by a firm is called a(n) ___.

initial public offering

CH16 According to critics of Modigliani and Miller (M&M), M&M capital structure theory is _____.

irrelevant

CH15 A company must file a registration statement with the SEC unless the _____.

issue is less than $5 million

CH16 The manager of a firm should change the capital structure if and only if ___.

it increases the value of the firm

CH12 Greater return volatility produces a (smaller/larger) difference between the arithmetic and geometric averages.

larger

CH15 To take advantage of a rights offering, a shareholder may order some or all of the rights to be sold, exercise the right, or _____.

let the right expire

CH16 The risk of too much _______ is bankruptcy.

leverage

CH16 M&M Proposition I does not work with corporate taxes because ___.

levered firms pay lower taxes than unlevered firms

CH15 How a firm raises capital depends on the size of the firm, its growth prospects, and its _____.

life-cycle stage

CH12 The Ibbotson-Sinquefield data shows that ___.

long-term corporate bonds had less risk or variability than stocks

CH15 Dilution is defined as a(n) ____.

loss in existing shareholders' value

CH16 The value of a levered firm will be greater than the value of an identical unlevered firm because the levered firm's taxes will be

lower

CH15 Potential reasons for stock price declines after the announcement of new equity issues include debt usage, issue costs, and _____.

managerial information

CH16 A company should select the capital structure that _____.

maximizes the company's value

CH16 The benefits of debt financing _____ the costs of financial distress.

may be more than offset by

CH15 The available evidence indicates that there are pronounced cycles in the degree of IPO underpricing and the _____.

number of IPOs

CH15 In order to issue a security to the public, management's first step is to ___.

obtain board approval

CH16 The absolute priority rule establishes priority _____.

of claims in liquidation

CH12 Studying market history can reward us by demonstrating that _____.

on average, investors will earn a reward for bearing risk the greater the potential reward is, the greater the risk

CH13 By definition, what is the beta of the average asset equal to?

one

CH12 The year 2008 was _____.

one of the worst years for stock market investors in U.S. history

CH15 In the world of start-up ventures, OPM stands for ____.

other people's money

CH15 The _____ phenomenon refers to the fact that most firms may raise their IPO offer prices, but they typically do not move the price high enough.

partial adjustment

CH12 Variance is measured in ___, while standard deviation is measured in ___.

percent squared; percent

CH16 The expected return on equity is _____ to leverage.

positively related

CH15 The market for venture capital refers to the _____.

private financial marketplace for new or distressed firms

CH15 The lockup period in an underwriting contract _____.

prohibits insider shares from being sold immediately following an IPO

CH14 The _____ approach is the use of a WACC that is unique to a particular project, based on companies in similar lines of business.

pure play

CH15 The period of time before and after an IPO when communication with the public is limited is known as the ______ period.

quiet

CH14 If an all-equity firm discounts a project's cash flows with the firm's overall weighted average cost of capital even though the project's beta is less than the firm's overall beta, it is possible that the project might be _____.

rejected, when it should be accepted

CH12 The arithmetic average rate of return measures the ____.

return in an average year over a given period

CH15 The main difference between an ordinary call option and a right is that _____.

rights are issued by the firm

CH15 It is impossible to underprice a(n) ______.

rights offering

CH16 Volatility or ______ increases for equity holders when leverage increases.

risk

CH16 The point at which the tax saving from an additional dollar in debt financing is exactly balanced by the increased costs of bankruptcy associated with additional borrowing is the essence of the _____.

static theory of capital structure

CH12 Kate Corporation has discovered a very secret new product, but hasn't yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate "leaks"), the market is _____ form efficient.

strong

CH13 The systematic risk principle argues that the market does not reward risks _____.

that are borne unnecessarily

CH16 It is often in everyone's best interest to devise a "workout" strategy that avoids bankruptcy because _____.

the bankruptcy process can be long and expensive

CH16 MM Proposition II shows that ___.

the cost of equity rises with leverage.

CH15 Possible explanations of the drop in a stock's price after an announcement of a new equity issue are that the announcement is an indication that ___.

the firm has too much debt management believes the firm is overvalued

CH16 A firm's capital structure refers to ___.

the firm's mix of debt and equity

CH16 A beneficial rule to follow is to set the firm's capital structure so that

the firm's value is maximized

CH12 The greater the risk,

the greater the required return.

CH15 The funds to be raised divided by the subscription price is the equation for _____.

the number of new shares

CH13 The portfolio weight is _____.

the percentage of the total value that is invested in an asset

CH15 When average investors in an IPO receive their full allocation of new shares because the smart money avoided the issue, they fall victim to ____.

the winner's curse

CH14 Finding a firm's overall cost of equity is difficult because _____.

there is no way of directly observing the return that the firm's equity investors require on their investment

CH14 If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept ______ projects.

too many high-risk

CH12 U.S. T-bills had the lowest risk or variability

true

CH13 The beta coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.

true

CH13 The increase in the number of stocks in a portfolio results in a decrease in the average standard deviation of annual portfolio returns.

true

CH13 The principle of diversification tells us that spreading an investment across a number of assets will eliminate some of the risk

true

CH13 The systemic risk principle argues that the market does not reward unnecessary risk that is taken on by the investor.

true

CH14 A company can deduct interest paid on debt when computing taxable income.

true

CH14 A firm's cost of capital will reflect both its cost of debt capital and its cost of equity capital

true

CH14 A firm's overall cost of capital will include both its cost of debt capital and equity capital.

true

CH14 Capital structure weights can be interpreted just like portfolio weights.

true

CH14 Economic value added (EVA) is a means of evaluating corporate performance

true

CH14 Ideally, we should use market values in the WACC Book values are often similar to market values for debt.

true

CH14 True Under U.S. tax law, a corporation's interest payments are deductible for tax purposes.

true

CH14 True or false: The return an investor in a security receives is equal to the cost of the security to the company that issued it.

true

CH14 WACC is used to discount cash flows

true

CH15 A rights offering provides the main benefit of avoiding dilution, or loss in value, of ownership for existing shareholders.

true

CH15 A stock typically goes ex rights one trading day(s) before the holder-of-record date

true

CH15 A stock typically goes ex rights one trading day(s) before the holder-of-record date.

true

CH15 Access to venture capital is very limited and it is estimated that only one company is funded for every 100 proposals received.

true

CH15 Another name for a rights offering is a(n) privileged subscription

true

CH15 Firm commitment underwriting is the type of underwriting in which the underwriter purchases the entire issue

true

CH15 If a direct listing, a firm arranges for its stock to be listed on an exchange without marketing and other help from an underwriter.

true

CH15 In the 1999-2000 time period, companies missed out on $67 billion

true

CH15 Investment firms that act as intermediaries between the company selling securities and the public are called underwriters

true

CH15 The flotation costs are the costs associated with new issues

true

CH15 The large payoff for a venture capital firm typically comes when the company is either sold to another company or goes public

true

CH15 The number of rights needed to buy one share of stock is found by dividing the old shares by the new shares

true

CH15 The period after a new issue is initially sold to the public is called the aftermarket

true

CH15 The quiet period ends 40 calendar days after an IPO.

true

CH15 The type of underwriting that requires the underwriter to purchase unsubscribed shares is known as standby underwriting.

true

CH15 The winner's curse describes how average investors in an IPO receive their full allocation of new shares because those in the know avoided the issue

true

CH15 True or false: Any decrease in market value when new shares are issued is attributable to the company using the proceeds to invest in negative NPV projects.

true

CH15 True or false: The most difficult part of the underwriting process for an initial public offering is determining the correct offer price.

true

CH15 True or false: The partial adjustment phenomenon refers to the fact that firms only raise their IPO offer prices partially.

true

CH16 The static theory is the dominant theory of capital structure.

true

CH16 True or false: In the extended pie model, bankruptcy costs are a claim on cash flows of the firm.

true

CH15 In the 1999-2000 time period, companies missed out on $67 billion because of ___.

underpricing

CH15 Which new issue cost results from a stock initially being sold for less than its true value?

underpricing

CH15 An initial public offering (IPO) is also referred to as a(n) ___.

unseasoned new issue

CH14 The cost of capital depends primarily on the (use/source) of funds.

use

CH12 Based on the historical returns shown in the text, the average inflation

was 2.9 percent per year over the 94-year span depicted.

CH12 The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient.

well-organized

CH15 In a direct listing, a firm arranges for its stock to be listed on an exchange:

without marketing and other help from an underwriter.

CH14 MNO preferred stock pays a dividend of $2 per year and has a price of $20. If MNO's tax rate is 21 percent, the required rate of return on its preferred stock is found by which formula?

$2/$20

CH14 Including preferred stock in the WACC adds the term

(P/V) × RP

CH16 Which of the following are consequences of nonpayment of debt obligations?

A firm may be forced to file for bankruptcy. The firm will encounter some form of financial distress

CH16 The costs of financial distress depend mostly on how easily the ownership of the firm's ________ can be transferred.

Assets

CH12 If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using:

Blume's formula

CH12 If you buy a stock for $10 and later sell it for $16, you will have a ____.

Capital gain of $6

CH12 The ______ rate of return is the difference between risky returns and risk-free returns.

Excess

CH13 Which of the following are examples of a portfolio?

Investing $100,000 in a combination of U.S. and Asian stocks Holding $100,000 investment in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations

CH13 What is systematic risk?

It is a risk that pertains to a large number of assets.

CH15 Since most banks will not loan to startup companies with no assets, most startup ventures need _____.

OPM

CH13 The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.

Positive

CH14 What is the required return on a stock (RE), according to the constant dividend growth model, if the growth rate (g) is zero?

RE = D1/P0

CH16 According to the pecking order theory, what is the preferred source for firms seeking to raise capital?

Retained earnings

CH12 A capital gain on a stock results from an increase in ______.

Stock price

CH14 With the use of the ____ approach to estimating WACC, the firm's WACC may change through time as economic conditions change

Subjective

CH16 Which of the following will apply when a firm's debt levels are extremely high?

The benefits of debt financing may be more than offset by the costs of financial distress. The possibility of financial distress will become a chronic problem

CH13 The SML is very important because it tells us the "going rate" for bearing risk in the economy

True

CH15 A Green Shoe provision is used to ___.

cover excess demand and oversubscriptions

CH15 True or false: During the aftermarket period, is it typical for members of the underwriting syndicate to sell securities for less than the offering price.

false

CH12 The second lesson from studying capital market history is that risk is _____.

handsomely rewarded

CH16 If the degree of leverage increases, the cost of debt will ______.

increase

CH14 Preferred stock ___.

pays a constant dividend pays dividends in perpetuity

CH12 When a company declares a dividend,

shareholders generally receive cash.

CH13 The risk of owning an asset comes from:

surprises Unanticipated events

CH16 One of the important reasons why firms choose to raise capital by issuing debt is because of the ______ benefits of debt.

tax

CH13 The standard deviation is ___.

the square root of the variance

CH15 If a cash offer is a public offer, a(n) ________ is usually involved.

underwriter