FIN 313 Exam 3 Hadley Concept Q's

BSB recently offered to sell 45k newly issued shares of a stock to the public. the underwriters charged a 8% fee and paid BSB 16.40 a share on 40k shares. what type of underwriting is this?

Best efforts ( Underwriter sells as many shares as possible at the agreed price)

when a firm announces an upcoming seasoned stock offering, the market price of the firms existing shares tend to:

Decrease

A firms cost of capital:

Depends upon how the funds raised are going to be spent

shares of PLS have been selling with rights attached. tomorrow the stock will sell independent of these rights.. what is the term associated to this action?

Ex-rights date

what type of underwriting is it when a firm has an offer price higher than initial?

Firm commitment

when a firm decides to incorporate and offer shares of stocks to the general public. what is this type of an equity offering called?

Initial public offering (IPO)

which of the following statements concerning dilution is correct?

Market Value dilution occurs when the NPV of a project is negative

existing shareholders:

May or may not have a preemptive right to newly issued shares

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project the manager is utilizing the _______ approach?

Pure Play

alberto currently owns 2500 shares of southern tools. he has just been notified that the firm is issuing additional shares and he is being given a chance to purchase some of these shares 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 a newly issued equity shares by a firm that is currently publicly owned

jess invested in stock when the firm was unlettered. since then, the company changed its capital structure and now has a debt-equity ratio of .3. to unlever her position, jess needs to:

Sell some shares of stock and loan out the sales proceeds

What is more important, the use of funds or the source?

The USE

Which one of the following statements related to WACC is correct for a firm that uses debt in its capital structure?

The WACC should decrease as the firms debt-equity ratio increases

M&M proposition I with no tax supports the argument that:

The debt-equity ration of a firm is completely irrelevant

M&M Prop 1 with taxes is based on the concept that:

The value of a firm increases as the firms debt increases because of the interest tax shield

the average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the____?

Weighted average cost of capital (WACC)

M&M proposition 1 with tax implies that:

a firms WACC decreases as the firms debt-equity ratio increases

The capital structure weights used in computing a firms WACC:

are based on the market values of the firms debt and equity securities

financial risk is:

dependent on a firms capital structure

you have computed the break even point between a levered and an unlettered capital structure. ignoring taxes, at the break even level the:

firm is earning just enough to pay for the cost of debt

The dividend growth model cannot be used to compute the cost of equity for a firm that:

has a retention ratio of 100 percent

the interest tax shield is a key reason why:

the net cost of debt to a firm is generally less than the cost of equity