FIN 701 Final exam

When is the ex-dividend date?

2 days before sharehold of record day

Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following? A) green shoe provision B) red herring provision

A) Green shoe provision

You have computed the break even point between a levered and an unlevered capital structure. Ignore taxes. At the break even level the: A) company is earning just enough to pay for the cost of the debt B) company's earnings before interest and taxes are equal to zero.

A) company is earning just enough to pay for the cost of the debt

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform asking price. Which one of the following terms best describes this underwriting? A) dutch auction B) best efforts C) public rights D) private placement E) market commitment

A) dutch auction

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings? A) interest tax shield B) interest credit C) homemade leverage shield D) current tax yield E) tax-loss interest

A) interest tax shield

The proposition that a company borrows up to the point where the marginal benefit of the interest tax shield derived form increase debt A) static theory of capital structure B) the pecking order theory

A) static theory of capital structure

M&M Proposition I with taxes implies that: A) weighted average cost of capital decreases as the debt equity ratio increases B) value of a company is inversely related to the amount of leverage used by that company

A) weighted average cost of capital decreases as the debt equity ratio increases

which one of the following does not affect the total equity of a company but does increase the number of outstanding shares A) special dividend B) stock split C) share repurchase D) rights offer E) liquidating dividend

B) stock split

what is the information content effect: A) any type of reaction from a shareholder in response to a news announcement related to the stock issuer B) the financial market's reaction to a change in the amount of company's dividend

B) the financial market's reaction to a change in the amount of company's dividend

Which one of the following statements is correct in relation to M&M proposition II: A)The cost of equity remains constant as the debt equity ratio increases B) the required return on assets is equal to the weighted average cost of capital.

B) the required return on assets is equal to the weighted average cost of capital.

Advertisements in a financial newspaper announcing a public offerings of securities along with a list of the investment banks handling the offering, are called A) red herrings B) tombstone

B) tombstone

Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the: A) compound rate B) current yield C) cost of debt

C) cost of debt

HJ Corporation has excess cash and has opted to buy some of its shares of outstanding common stock. What is this process of buying called? A) Stock dividend B) stock split C) stock repurchase

C) stock repurchase

which one of the following is a key goal of the aftermarket period A) collecting he largest number of Dutch auction bids as possible B) determining a fair offer price C) supporting the market price for a new securities issue D) establishing a broad-based underwriting syndicate E) distributing red herrings to as many potential investors as possible

C) supporting the market price for a new securities issue.

Executive tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as A) aftermarket specialist B)venture capitalist C) underwriter D) seasoned writer

C) underwriter

The optimal capital structure has been achieved when the: A) debt equity ratio is equal to 1 B) weight of equity is equal to the weight of debt C)Debt-equity ratio results in the lowest possible weighted average cost of capital

C)Debt-equity ratio results in the lowest possible weighted average cost of capital

The dividend market is in equilibrium when: A. All firms adopt a low dividend policy. B. Half of the firms adopt a low dividend policy and half adopt a high dividend policy. C. All clienteles are satisfied. D. Dividends remain constant and no special dividends are declared. E. The total amount of the annual dividends is equal to the net income for the year.

C. All clienteles are satisfied.

The interest tax shield is a key reason why: A. the required rate of return on assets rises when debt is added to the capital structure. B. the value of an unlevered firm is equal to the value of a levered firm. C. the net cost of debt to a firm is generally less than the cost of equity. D. the cost of debt is equal to the cost of equity for a levered firm. E. companies prefer equity financing over debt financing.

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

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered share anytime during the subsequent A) 3 months B) 6 months C) 180 days D) 2 years

D) 2 years

Which one of these describes an exception to the registration filing requirements of the SEC A) loans that mature in one year or less B) issues that have an approved prospectus C) loans of 10 million or less D) issues of less than 5 million

D) issues of less than 5 million

The securities and exchange commission A) verifies the accuracy of the information contained in the prospectus B) publishes red herrings on prospective new security offerings C) examines the prospectus during the green shoe period D) reviews registration statements to ensure they comply with current laws and regulations

D) reviews registration statements to ensure they comply with current laws and regulations

Alberto currently owns 2,500 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? A) best efforts offer B) firm commitment offer C) general cash offer D) rights offer

D) rights offer

The value of a firm is maximized when the: A. Cost of equity is maximized. B. Tax rate is zero. C. Levered cost of capital is maximized. D. Weighted average cost of capital is minimized. E. Debt-equity ratio is minimized.

D. Weighted average cost of capital is minimized.

All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. A) reduction in the dividend amount B) an increase in the dividend amount C) A reduction in the market rate of return D) A reduction in the firm's beta E) A reduction in the risk free rate

E) A reduction in the risk free rate

which one of the following is a preliminary prospectus A) tombstone B) Green shoe C) registration statement D) rights offer E) Red herring

E) Red herring

Jones & Co. recently went public and received 23.07 a share on their entire offer of 30,000. Kesser & Co. served as the underwriter and sold 28,500 shares to public at an offer price of 26.50 a share. What type of underwriting was this A) best efforts B) shelf C) oversubscribed D) private placement E) firm commitment

E) firm commitment

A syndicate can best be defined as a A) venture capitalist B) group of attorneys providing services for an IPO C) block of investors who control a firm D) bank that loans funds to finance the start up of new company E) group of underwriters sharing the risk of selling a new issue of securities

E) group of underwriters sharing the risk of selling a new issue of securities

The fact that flotation costs can be significant is an argument for: A) issuing larger regular dividends than the industry norm B) maintaining a constant dividend policy even if the firm frequent has to issue new shares E) maintaining a low dividend policy and rarely issuing extra dividends.

E) maintaining a low dividend policy and rarely issuing extra dividends.

All of the following are supporting arguments in favor of IPO under-pricing except which one A) helps prevent the winners curse B) rewards institutional investors who share their market value opinions C) reduces potential lawsuits against underwriters D) diminishes underwriting risk E) provides better returns to issuing firms

E) provides better returns to issuing firms

The average of a company's cost of equity, cost of preferred and aftertax cost of debt that is weighted based on the company's capital structure is called: A) reward to risk ratio B) weighted capital gains rate C)structured cost of capital D) subjective cost of capital. E) weighted average cost of capital

E) weighted average cost of capital

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. A) subjective risk B) pure play

Pure play

What is a prospectus?

a document that describes the details of a proposed security offering along with relevant information about the issuer

Existing shareholders: a. may or may not have a preemptive right to newly issued shares. b. must purchase new shares whenever rights are issued. c. are prohibited from selling their rights. d. are generally well advised to let the rights they receive expire. e. can maintain their proportional ownership positions without exercising their rights.

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

Underwriters generally: a. pay a spread to the issuing firm. b. provide only best efforts underwriting in the U.S. c. accept the risk of selling the new securities in exchange for the gross spread d. market and distribute an entire issue of new securities within their own firm. e. pass the risk of unsold shares back to the issuing firm via a firm commitment agreement

c. accept the risk of selling the new securities in exchange for the gross spread

Financial risk is dependent on what?

dependent upon a company's capital structure

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

indirect bankruptcy

Which type of dividend is considered to be a one time event that will not be repeated

special dividend

Which one of these will increase a company's aftertax cost of debt A) A decrease in the company's debt-equity ratio B) a decrease in the company's tax rate

B) A decrease in the company's tax rate

Which of the following states that the value of a company is unrelated to the company's capital structure A) homemade leverage B) M&M proposition I no tax C) M&M proposition II no tax

B) M&M proposition I no tax

which one of the following statements related to cash dividends is correct A) extra cash dividends cannot be repeated in the future B) A dividend is never a liability of the issuer until it is declared.

B) a dividend is never a liability of the issuer until it is declared

With Dutch auction underwriting: A) all bidders receive at least a portion of the quantity for which they bid. B) all successful bidders pay the same price. C) the selling firm receives the maximum possible price for each security sold. D) the bidder for the largest quantity receives the first allocation of securities.

B) all successful bidders pay the same price.

The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to by which one of the following terms? A) information content B) clientele C) investor D) distribution E) market reaction

B) clientele

A group of individuals got together and purchased all of the outstanding shares of common stock DL smith inc. What is the return that these individuals require on this investment called A) dividend yield B) cost of equity C) capital gains yield

B) cost of equity

which one of the following is a marketed claim against the cash flows of a company A) tax payment to the IRS B) dividend payment to shareholders C) payment of employee's wages

B) dividend payment to shareholders

If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to: A) accept all positive net present value projects B) increase the average risk level of the company over time.

B) increase the average risk level of the company over time.

A stock repurchase program A) requires all shareholders to sell a fraction of their shares B) is essentially the same as a cash dividend program provided there are no taxes or other costs

B) is essentially the same as a cash dividend program provided there are no taxes or other costs

What is the answer when kate and Ted are in the question A) neither kate nor ted is entitled to the dividend B) kate is entitled to the dividend but ted is not C) ted is entitled to the dividend but kate is not.

B) kate is entitled to the dividend but ted is not

The optimal capital structure of a company: A) minimizes the company's tax payments B) maximizes the value of that company's marketed claims C) minimizes both the marketed and non marketed claims against that company

B) maximizes the value of that company's marketed claims

A firm should select the capital structure that: A. produces the highest cost of capital. B. maximizes the value of the firm. C. minimizes taxes. D. is fully unlevered. E. equates the value of debt with the value of equity.

B) maximizes the value of the firm

Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation? A) overallotment B) percentage ownership dilution C) Green shoe allocation

B) percentage ownership dilution

The 40 day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the ______ period A) auction B) quiet C) lockup D) green shoe E) red

B) quiet

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The firm plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this? A. standby registration B. shelf registration C. Regulation A registration D. Regulation Q registration E. private placement registration

B) shelf registration

The subjective approach to project analysis: A) is used only when a firm has an all equity capital structure B) uses the WACC of Firm X as the basis for the discount rate for a project under consideration by firm Y C) assigns discount rates to projects based on the discretion of the senior managers of a firm.

C) assigns discount rates to projects based on the discretion of the senior managers of a firm.

which one of the following dates is used to determine the names of shareholders who will receive a dividend payment A) ex rights date B) ex dividend date C) date of record

C) date of record

A $.45 quarterly cash payment paid by jones & Co to its shareholders in the normal course of business becomes a liability of the company on the: A) day prior to the ex- dividend date B) date of record C) declaration date D) payment date

C) declaration date

The explicit costs such as legal and administrative expenses associated with corporate default are classified as ______ costs A) flotation B) issue C) direct bankruptcy D) indirect bankruptcy E) unlevered

C) direct bankruptcy

what is an issue of securities that is offered for sale to the general public on a direct cash basis called? A) best efforts underwriting B) firm commitment underwriting C) General cash offer

C) general cash offer

Assume russo's has a dept equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the company's cost of equity A) is affected by the firm's rate of growth projections B) implies that the firm pays out all of its earnings to its shareholders C) is dependent upon a reliable estimate of the market risk premium D) would be unaffected if the dividend discount model were applied instead E) will be unaffected by changes in overall market risks.

C) is dependent upon a reliable estimate of the market risk premium

A company's weighted average cost of capital: A) is equivalent to the aftertax cost of the outstanding liabilities B) should be used as the required return when analyzing any new project C) is the return investors require on the total assets of the firm

C) is the return investors require on the total assets of the firm

The cost of preferred stock is computed the same as the: A) pretaxt cost of debt B) rate of return on an annuity C) aftertaxt cost of debt D) Rate of return on a perpetuity

D) Rate of return on a perpetuity

A company's current cost of capital is based on A) Only the return required by the company's current shareholders B) Current market rate of return on equity shares C) weight costs of all future funding sources D) both returns currently required by its debtholders and stockholders

D) both returns currently required by its debtholders and stockholders

Which one of the following is the equity risk that is most related to the daily operations of a firm: A) market risk B) systematic risk C) extrinsic risk D) business risk

D) business risk

Assume you are reviewing a graph that plots earnings per share against earnings before interest and taxes (EBIT). The steeper the slope of the plotted line the: A) lower the impact of financial leverage B) lower the debt equity ratio C) higher the tax rate D) greater the sensitivity of EPS to changes in EBIT

D) greater the sensitivity of EPS to changes in EBIT

the business risk of a company A) depends on the company's level of unsystematic risk B) is inversely related to the required return on the company's assets C) is dependent upon the relative weights of the debt and equity used to finance the company D) has a positive relationship with the company's cost of equity

D) has a positive relationship with the company's cost of equity