Finance Exam 3
Dynamo Corporation has semiannual bonds outstanding with 12 years to maturity, and the bonds are currently priced at $1,080.29. If the bonds have a coupon rate of 8 percent, then what is the equivalent annual return (EAR) to the investor for purchasing the bonds at the described price? Round your final percentage answer to two decimal places. A) 3.5% B) 7.00% C) 7.12% D) 8.00%
C
Ferrico, Co. is currently trading at $37.00 per share. The company is paying a regular cash dividend of $0.40 per share and an extra dividend of $0.10 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company. How much do you expect the company's stock to trade for tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal places.) A) $36.43 B) $36.50 C) $36.58 D) $37.00
C
Jupiter, Co. will be distributing $40 million to shareholders through a special dividend. The company has 160 million shares outstanding. If you own 100 shares of Jupiter, Co. how much will you receive? Ignore taxes. A) $400 B) $100 C) $25 D) None of these
C
Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay a dividend of $2.34 per share a year from today. What is the firm's cost of preferred equity? A) 11.50% B) 11.75% C) 12.00% D) 12.25%
C
Stamp, Inc. has an operating cycle of 81 days and takes 47 days to collect on its receivables. What is its level of inventory if the firm's cost of goods sold is $312,455? Round your final answer to the nearest dollar. A) $9,190 B) $14,685 C) $29,105 D) $69,339
C
You own 20,000 shares of stock in Casi-knows, Inc. which has just sold one of its large resort hotels for $300 million. Management intends to return the entire revenue from the sale to shareholders by issuing a special dividend. If Casi-knows has 20 million shares outstanding, how large a dividend payment do you expect to receive? A) $20,000 B) $200,000 C) $300,000 D) $1,000,000
C
Which of the following statements is NOT true? A)If cash balances become too small, it may lead the firm to bankruptcy. B) The lower the cash balance, the better the ability of a firm to meet its short-term financial obligations. C) The level of the cash balance has no bearing on a firm's ability to meet its short-term financial obligations. D) The downside of holding too much cash is that the returns on cash are low.
B
Which of the following statements is true? A) Cash conversion cycle= DSO+DSI+DPO B) Cash conversion cycle= DSO+DSI-DPO C) Cash conversion cycle= DSO-DPO D) None of the above.
B
You own 10,000 shares of Mars, Co. which is currently trading for $11.50 per share. The company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow is the ex-dividend day. Ignoring taxes, what do you expect your block of shares will be worth tomorrow? A) $15,000 B) $100,000 C) $115,000 D) $200,000
B
Tactics that venture capitalists use to reduce the risk of their investment include A) funding the ventures in stages, requiring entrepreneurs to take charge of all important business decisions . B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. D) None of the above
C
Bellamee, Inc. has semiannual bonds outstanding with five years to maturity, and the bonds are priced at $920.87. If the bonds have a coupon rate of 7 percent, then what is the YTM for the bonds? Round your final percentage answer to two decimal places. A) 4.5% B) 7.0% C) 9.0% D) 9.2%
C
Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity? Round your final answer to nearest percentage. A) 7% B) 8% C) 9% D) 10%
C
Data from the marketplace show that the shares sold in an IPO are typically A) priced between 2 and 5 percent below the price at which they close at the end of the first day of trading. B) priced between 10 and 15 percent above the price at which they close at the end of the first day of trading. C) priced between 10 and 15 percent below the price at which they close at the end of the first day of trading. D) priced between 2 and 5 percent above the price at which they close at the end of the first day of trading.
C
Dennis Compton, Inc. has total assets of $5,335,901 and a capital intensity of 53.9%. What is the firm's sales? (Round to nearest whole dollar.) A) $5,335,901 B) $2,828,028 C) $9,899,631 D) None of these
C
The Dedus Shoes, Inc. has common shares with a price of $28.76 per share. The firm paid a dividend of $1.00 yesterday, and dividends are expected to grow at 10 percent for two years and then at 5 percent, thereafter. What is the implied cost of common equity capital for Dedus? Round your final percentage answer to 1 decimal place. A) 7.00% B) 8.00% C) 9.00% D) 10.00%
C
The strategic plan does NOT identify A) major areas of investment in productive assets. B) future mergers, alliances, and divestitures. C) working capital strategies. D) the lines of business a firm will compete.
C
The three principal ways in which venture capital firms exit venture-backed companies are A) selling to a strategic buyer, buying out the founder, and offering stock to the public. B) selling to a strategic buyer, selling to a financial buyer, and buying out the founder. C) selling to a strategic buyer, selling to a financial buyer, and offering stock to the public. D) None of the above
C
Tranquility, Inc. has common shares with a price of $18.37 per share. The firm paid a dividend of $1.50 yesterday, and dividends are expected to grow at 9 percent for three years and then at 2 percent thereafter. What is the implied cost of common equity capital for Tranquility? Round your final percentage answer to 1 decimal place. A) 9.5% B) 10.5% C) 11.5% D) 12.5%
C
Trend Foods distributes its products to more than 100 restaurants and delis. The company's collection period is 32 days, and it keeps its inventory for 10 days. What is Trend's operating cycle? A) 22 days B) 32 days C) 42 days D) None of the above
C
Which of the following is NOT true about the capital budgeting process? A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders. B) Rapid growth is considered a desirable achievement in capital budgeting decisions. C) Once the list is made, no management review can change it. D) All of these
C
Which of the following statements in using more sophisticated planning models is NOT true? A) Current liabilities are likely to vary directly with sales. B) Long-term liabilities and equity accounts change as a direct result of managerial decisions. C) Retained earnings will vary directly as sales changes. D) All of these
C
Which of the following statements is NOT true? A) Investment bankers provide three basic services when bringing securities to market—origination, underwriting, and distribution. B) During the origination phase, the investment banker helps the firm determine whether it is ready for an IPO. C) Origination is the risk-bearing part of investment banking. D) Origination includes giving the firm financial advice and getting the issue ready to sell.
C
Which of the following statements is NOT true? A) The internal growth rate (IGR) is defined as the maximum growth rate that a firm can achieve without external financing. B) The higher the retained earnings generated by a firm, the higher the growth possible without using external funding. C) Given the same level of retained earnings, a firm that has the higher amount of total assets has a higher growth possibility without using external funding. D) All of these
C
Which of the following statements is true? A) After the IPO, there is a less active secondary market for the firm's shares. B) Only smaller amounts of capital can be raised through an IPO than the amount that can be raised through private sources. C) Publicly traded firms find it easier to attract top management talent. D) Going public can enable an entrepreneur to fund a growing business but not without giving up control.
C
Doorstep, Co. stock is currently trading at $25.70 per share. The company pays a regular cash dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved. A) $0.40 B) $25.24 C) $25.30 D) $25.36
C
Le Baron Company, a men's designer firm, has an operating cycle of 123 days. The firm's days' sales in inventory is 73 days. How much does the firm have in receivables if it has credit sales of $433,450? Round your final answer to the nearest dollar. A) $59,377 B) $71,252 C) $47,501 D) $64,233
A
A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months is A) $60. B) $30. C) $30 plus or minus the prorate portion of the discount or premium that the bond was purchased for. D) $60 plus or minus the prorate portion of the discount or premium that the bond was purchased for.
B
Advantages of going public include all EXCEPT A) larger amount of capital can be raised this way than the amount that can be raised through private sources. B) the cost of going public is less compare to debt financing. C) going public can enable an entrepreneur to fund a growing business without giving up control. D) additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost
B
An operating lease is treated like a purchase for accounting purposes. A) True B) False
B
Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and the bonds are currently priced at $746.16. If the bonds have a coupon rate of 8.5 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 35%? Round your intermediate calculation to two decimal places & final percentage answer to three decimal places. A) 6.250% B) 8.125% C) 12.500% D) 12.890%
B
Borrowing money and paying out a special dividend to shareholders is an example of the asset substitution problem. A) True B) False
B
Bright Capital, Inc. is being liquidated. The company's assets can be sold for $20 million. It will cost $18 million for the company to meet all its previous obligations and to pay-off debt holders. The company has 30 million shares outstanding. If you own 2,000 shares, how much do you expect to receive in liquidating dividends? Ignore taxes. (Round your final answer to two decimal places.) A) $0.00 B) $133.33 C) $266.66 D) $1,200.00
B
Consider a company that had unexpected higher earnings last quarter, and it intends to pay out some additional value to shareholders. Which of the following types of dividend is the company likely to use? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend
B
Daniel, Co. stock is currently trading at $38.15 per share. The company pays a regular cash dividend of $0.80 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is no new information released about the company. How much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved. A) $37.47 B) $37.35 C) $37.32 D) $37.23
B
Estimates of expected returns based on market security prices will be reliable in all types of markets, including those deemed less efficient than others. A) True B) False
B
Firms that achieve higher growth rates without seeking external financing A) have a low plowback ratio. B) have less equity and/or are able to generate high net income leading to a high ROE. C) are highly leveraged. D) None of these
B
Income taxes have the effect of A) increasing the cost of debt for a firm. B) decreasing the cost of debt for a firm. C) decreasing the cost of equity for a firm. D) Both B and C are correct
B
Industries with large amounts of tangible assets typically use little debt. A) True B) False
B
Managers often focus on cash flows, but reported accounting earnings are a better indicator of a firm's economic health. A) True B) False
B
Mercury, Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed, about how much do you expect the price of Mercury, to drop on the ex-dividend day? The tax rate on dividends is 15 percent. (Round your final answer to two decimal places.) A) $0.07 B) $0.38 C) $0.45 D) $0.52
B
More debt in a firm's capital structure provides managers with an incentive to maximize cash flows, but also makes them want to take on negative NPV projects. A) True B) False
B
More profitable firms have less debt, which supports the trade-off theory. A) True B) False
B
Oasis, Inc. has common shares with a price of $21.12 per share. The firm is expected to pay a dividend of $1.75 one year from today, and dividends are expected to grow at 10 percent for two years after that and then at 5 percent thereafter. What is the implied cost of common equity capital for Oasis? Round your final answer to nearest percentage. A) 13% B) 14% C) 15% D) 16%
B
Provisions that are part of venture capital agreements include A) timing of exit, number of board positions after exit, and what price is acceptable. B) timing of exit, the method of exit, and what price is acceptable. C) the method of exit, number of board positions after exit, and what price is acceptable. D) None of the above
B
Suppose that the government raises short and long-term capital gains taxes while leaving all other taxes unchanged. This tax rate change would encourage companies to increase the use of stock repurchases rather than issuing dividends. A) True B) False
B
The CAPM can only be used to determine the cost of common equity. A) True B) False
B
The cash conversion cycle A) shows how long a firm keeps its inventory before selling it. B) begins when a firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures. C) begins when a firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. D) estimates how long it takes on average for a firm to collect its outstanding accounts receivable balance.
B
The correct Treasury rate to use in calculating the cost of equity (when using the CAPM) for a firm is a short-term rate. A) True B) False
B
The correctly calculated weighted average cost of capital for a firm can be used to discount the cash flows for any new project that the firm may undertake in the future. A) True B) False
B
The higher a firm's dividend payout ratio, the higher is the firm's internal growth rate. A) True B) False
B
The market risk premium for the future is always perfectly known, and it is 6.51 percent. A) True B) False
B
The shares of Milton, Inc. fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which of the following explanations may explain investors' negative reaction? A)Changes in regular cash dividends are made frequently so that the company's management can adjust for changes in short-term earnings. B) Investors previously believed the company had many lucrative growth opportunities. By announcing higher regular cash dividends, the company is sending a signal that it doesn't have enough positive NPV projects to use all the money. C) Investors expected that the company would announce a stock repurchase rather than a cash dividend increase. Since a change in dividend policy is commonly viewed as a weaker signal than a stock repurchase. The share price fell on the news of the dividend increase. D) None of these
B
The sustainable growth rate is the rate of growth that a firm can sustain without selling additional debt. A) True B) False
B
The three basic costs associated with issuing stock in an IPO are A) price premium, out-of-pocket expenses, and underpricing. B) underwriting spread, out-of-pocket expenses, and underpricing. C) underwriting spread, price premium, and underpricing. D) None of the above
B
Under the pecking order theory, debt is factually the cheapest source of funds due to the interest tax shield. A) True B) False
B
Unlike direct bankruptcy costs, indirect costs are not considered transaction costs. A) True B) False
B
Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay a dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? Round your final answer to nearest percentage. A) 6.50% B) 7.00% C) 7.50% D) 8.00%
B
When a firm is in financial distress, stockholders would like to overinvest in positive NPV projects. A) True B) False
B
When a firm maintains a constant dividend policy, the firm's growth rate has no bearing on the external financing needed. A) True B) False
B
Which of the following is the equation for net working capital? A) Total assets - total liabilities B) Current assets - current liabilities C) Current assets / current liabilities D) Total assets / total liabilities
B
Which of the following statements in accounting for changes in fixed assets is NOT true? A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets. B) Since it requires time to get new assets operational, they are added in small discrete quantities. C) Fixed assets are added in large discrete units called lumpy assets. D) All of these
B
Which of the following statements is NOT true? A) The cash conversion cycle begins when a firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures. B) The cash conversion cycle begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. C) To measure the cash conversion cycle, we need another measure called the days' payables outstanding. D) The cash conversion cycle ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by a firm to pay for its purchases.
B
Which of the following statements is NOT true? A) Venture capitalists bear a substantial amount of risk when they fund a new business. B) Venture capitalists' sole function is to provide financing for new firms. C) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices. D) A significant number of venture capital firms focus on high-technology investments.
B
Which of the following statements is NOT true? A) Venture capitalists often require an entrepreneur to make a substantial personal investment in the business. B) Syndication occurs when the originating venture capitalist buys off other venture capitalists involved in the venture. C) Another factor that reduces risk is the venture capitalist's in-depth knowledge of the industry and technology. D) The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the firm's financial performance.
B
The strategic plan identifies A) the lines of business in which a firm will compete. B) major areas of investment in productive assets. C) capital expenditures, acquisitions, and new lines of business. D) All of these
D
The weighted average cost of capital (WACC) includes A) the required return on equity and required return on underlying firm assets. B) the cost of any long term debt and the cost of equity. C) the cost of any long term debt and required return on underlying firm assets. D) None of the above.
D
Which of the following components make up a financial plan? A) The strategic plan B) The investment plan C) The financing plan D) All of these
D
Which of the following includes weaknesses in financial planning models? A) Interest expense is not accounted. B) All working capital accounts do not necessarily vary directly with sales, especially cash and inventory. C) The way fixed assets are handled as lumpy assets, leaving the company with excess capacity. D) All of these
D
Which of the following is a reason financial policy might matter? A) Firms must pay corporate income taxes. B) Capital structure choices can affect firm's real investment decisions, such as R&D and PP&E. C) Information or transaction costs. D) All of the above
D
Which of the following is true about the capital budgeting process? A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders. B) Rapid growth is considered a desirable achievement in capital budgeting decisions. C) The cost of the projects should comply with the firm's budget constraints. D) All of these
D
Which of the following issues is addressed in a financial plan? A) Where is the company headed? B) What capital resources does the management need to get there? C) How is the firm going to pay for the resources needed? D) All of these
D
Which of the following statements in accounting for changes in fixed assets is NOT true? A) When a firm is not operating at full capacity, sales may be decreased without adding any new fixed assets. B) Since it requires time to get new assets operational, they are added as the firm nears full capacity. C) Fixed assets are added in large discrete units called lumpy assets. D) All of these
D
Which of the following statements in using more sophisticated planning models is true? A) Current liabilities are likely to vary directly with sales. B) Long-term liabilities and equity accounts change as a direct result of managerial decisions. C) Retained earnings will vary as sales changes but not directly as it is affected by the firm's dividend payout policy. D) All of these
D
Which of the following statements is NOT true? A) Cash conversion cycle= DSO+DSI-DPO B) Operating cycle= DSO+DSI C) Both A and B D) None of the above
D
Which of the following statements is NOT true? A) The process by which many entrepreneurs raise seed money and obtain other resources necessary to start their businesses is often called bootstrapping. B) Most businesses are started by an entrepreneur who has a vision for a new business or product and a passionate belief in the concept's viability. C) The initial "seed" money usually comes from the entrepreneur or other founders. D) The seed money is spent on developing an initial public offering.
D
Which of the following statements is true when managing working capital accounts? A) Maintain minimal raw material inventories without causing manufacturing delays. B) Use as little labor as possible to manufacture the product while producing a quality product. C) Delay paying accounts payable as long as possible without suffering any penalties. D) All of the above are true.
D
Which of the following statements is true? A) The venture capital industry as we know it today emerged in the late 1960s with the formation of the first venture capital limited partnerships. B) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices. C) A significant number of venture capital firms focus on high-technology investments. D) All of the above statements are true.
D
Which of the following steps in the dividend payment process for a public company usually results in a change in the company's stock price? A) Public announcement B) Ex-dividend date C) Payable date D) Both Public announcement and Ex-dividend date
D
With a best-effort underwriting A) the investment banking firm makes no guarantee to sell the securities at a particular price. B) the investment banker does not bear the price risk associated with underwriting the issue. C) the compensation is based on the number of shares sold. D) All of the above
D
In a world with no taxes, no information or transaction costs, a fixed real investment policy, a dividend policy should not affect the value of a firm. A) True B) False
A
Indirect bankruptcy costs include changes in customer and supplier behavior that negatively affect the firm. A) True B) False
A
Indirect bankruptcy costs will often increase when a firm is in financial stress and it may even push the company into bankruptcy. A) True B) False
A
It is unethical for a corporate board to conduct a large tender offer for stock repurchase when the board members have private information indicating that the company's share price is too low. A) True B) False
A
If a firm is currently paying common share dividends to investors and those dividends are expected to grow at a low but steady rate in the future, then the cost of common equity for the firm can be determined by also using the current price of the firm's common shares. A) True B) False
A
A firm's enterprise value is given as: A) the value of equity plus the value of debt. B) the value of equity minus the value of debt. C) the value of equity minus the value of debt plus the value of future projects. D) None of the above.
A
A typical venture capital fund may generate annual returns of A) 15 to 25 percent on the money that it invests, compared with an average annual return for the S&P 500 of almost 12 percent. B) 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 20 percent. C) 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 25 percent. D) None of the above
A
According to M&M Proposition 2, the cost of a firm's equity A) increases with the increase of debt-to-equity ratio. B) decreases with the decrease of debt-to-equity ratio. C) increases with the increase of cost of debt. D) decreases with increase of required rate of return on the firm's underlying assets
A
All Stars, Inc. has inventory of $44,233 and cost of goods sold of $512,902. The company has an operating cycle of 74 days. What is the firm's days' sales outstanding (DSO)? Round your answers to the nearest whole number. A) 43 days B) 32 days C) 49 days D) 26 days
A
Although stock splits do not add any value to a firm, investors tend to react positively to stock splits because management isn't likely to initiate a stock split if the firm's prospects are poor. A) True B) False
A
Disadvantages of going public include all EXCEPT A) managers' tendency to focus on long-term profits. B) the high cost of the IPO itself. C) the costs of complying with ongoing SEC disclosure requirements. D) the transparency that results from this compliance can be costly for some firms.
A
Dividend reinvestment programs allow investors to reinvest the dividends they receive into a company's stock without paying taxes on the dividends, or a transaction fee on the stock purchase. A) True B) False
A
Dividends reduce the value of lender claims, and this is why bondholders often limit a firm's ability to distribute cash to equity holders. A) True B) False
A
External funding needed (EFN) is A)the additional debt or equity a firm needs to issue so that it can purchase additional assets to support an increase in sales. B)the additional funds raised by a firm to pay off existing short-term debt. C)the additional funds raised by a firm to pay off existing long-term debt. D)None of these
A
Financial risk A) refers to the effect that a firm's financing decisions have on the riskiness of the cash flows that the stockholders will receive. B) increases a firm's business risk. C) decreases a firm's business risk. D) is related to how debt affects the business decisions of a firm.
A
Firms have a difficult time selling equity when it is in financial distress. A) True B) False
A
Holding the growth rate constant, the higher a firm's dividend payout ratio, the larger the amount of external debt or equity financing needed. A) True B) False
A
Lithion, Co. has a policy of returning a minimum of 25 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. What combination of dividends could the company's board approve to meet their target payout percentage? A) A regular cash dividend of $0.05 B) A regular cash dividend of $0.05 per share and an extra dividend of 0.05 per share C) A regular cash dividend of $0.05 per share and an extra dividend of $0.10 per share D) A regular cash dividend of $0.05 per share and an extra dividend of $0.20 per share
A
Moon, Co. is currently trading at $22.00 per share. The company is paying a regular cash dividend of $0.30 per share, and an extra dividend of $0.05 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal places) A) $21.70 B) $21.65 C) $21.60 D) $21.55
A
PackMan Corporation has semiannual bonds outstanding with nine years to maturity and the bonds are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 30 percent? Round your intermediate calculation to two decimal places & final percentage answer to three decimal places. A) 7.050% B) 8.225% C) 11.750% D) 12.095%
A
Paying a stock dividend does not involve the distribution of any value to the company's stockholders. A) True B) False
A
Some companies have been known for paying dividends to current stockholders while simultaneously raising capital through a new equity issue. Generally, this behavior is explained by the need to discipline managers by regularly exposing the company to the extra scrutiny involved in an equity issue. A) True B) False
A
Systematic risk is the only risk that investors require compensation for bearing. A) True B) False
A
The cost of equity for a firm must take the cost of preferred stock (if any has been issued) that the firm has outstanding into account. A) True B) False
A
The current cost of preferred equity can be found by taking the ratio of the annual dividend on the preferred stock to the current price of preferred shares. A) True B) False
A
The higher a firm's plowback ratio, the higher is its sustainable growth rate. A) True B) False
A
The lower a firm's ROE, the lower is the firm's sustainable growth rate. A) True B) False
A
The operating cycle A) begins when a firm receives the raw materials that would be used to produce the goods that the firm manufactures. B) begins when a firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. C) cannot be measured without knowing the days' payables outstanding. D) does not end with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.
A
The proportions of debt and equity used to determine the weighted average cost of capital for a firm is based on the market value of debt and equity outstanding. A) True B) False
A
The sustainable growth rate is the rate of growth that a firm can sustain without selling additional equity while maintaining the same capital structure. A) True B) False
A
The trade-off theory of capital structure states that leverage is increased until the marginal cost of debt is equal to the marginal benefit. A) True B) False
A
Traditionally, capital gains taxes on repurchases have been higher than the taxes on dividends. A) True B) False
A
Using a firm's overall cost of capital to evaluate a project's cash flows is problematic in that the firm is a collection of projects, with the possibility that each project has a different level of risk than the other projects currently working for the firm. A) True B) False
A
When trying to estimate the cost of equity for a firm using the CAPM, it is possible to find the beta of a comparable, publicly traded firm whose primary business is closely related to the firm. A) True B) False
A
Which of the following issues is NOT addressed in a firm's financial plan? A) What is the growth rate for the firm's main competitor? B) Where is the firm headed? C) What capital resources does the management need to get there? D) How is the firm going to pay for the resources needed?
A
Which of the following statements is NOT true? A) In a best-effort offering, the underwriters will suffer a financial loss if the offer price is set too high. B) In a best-effort agreement, the issuing firm will lose if the offer price is set too high. C) If the underpricing is significant, the investment banking firm will suffer a loss of reputation for failing to price the new issue correctly and raising less money for its client than it could have. D) Underpricing is defined as offering new securities for sale at a price below their true value.
A
Without debt in the capital structure, there are no asset substitution or underinvestment problems. A) True B) False
A
A firm's capital structure is the mix of financial securities used to finance its activities and can include all of the following except, A) common stock. B) bonds. C) equity options. D) preferred stock.
C
A) Steel Gen Corp regularly distributes $0.05 to each shareholder for every share they own. B) Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned. C) Churchill Downs, Inc. which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more than 100 shares in the company (as of 2012). D) Both Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned and Churchill Downs, Inc. which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more than 100 shares in the company (as of 2012)
C
All of the following about a firm-commitment underwriting is true EXCEPT A) the investment banker guarantees the issuer a fixed amount of money from the stock sale. B) the investment banker actually buys the stock from the firm. C) the issuer bears the risk that the resale price might be lower than the price the underwriter pays. D) the underwriter bears the risk that the resale price might be lower than the price the underwriter pays.
C
A financial restructuring A) will not change the value of a firm's real assets under M&M Proposition 1. B) includes financial transactions that change the capital structure of the firm. C) means that a firm has issued equity to retire debt. D) Both A and B.
D
Basic services investment bankers provide when bringing securities to market include A) origination. B) underwriting. C) distribution. D) All of the above
D
Bond issuance costs include A) investment banking fees. B) legal fees. C) accountant fees. D) All of the above
D
Earmark, Co. has a policy of returning a minimum of 40 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.35 per share. In each of the first three quarters the company paid a regular cash dividend of $0.10 per share. What combination of dividends could the company's board approve to meet their target payout percentage? A) A regular cash dividend of $0.10 per share. B) A regular cash dividend of $0.10 per share and an extra dividend of 0.56 per share. C) A regular cash dividend of $0.10 per share and an extra dividend of $0.46 per share. D) A regular cash dividend of $0.10 per share and an extra dividend of $0.16 per share.
D
Firms that achieve higher growth rates without seeking external financing A) have a high plowback ratio. B) have less equity and/or are able to generate high net income leading to a high ROE. C) are not highly leveraged. D) All of these
D
M&M Proposition 1 assumes all of the following except that, A) there are no taxes. B) there are no costs to acquire information. C) there are no transactions costs. D) the real investment policy of a firm is affected by its capital structure decisions.
D
M&M Proposition 2 states that the cost of a firm's common stock is directly related to A) the debt-to-equity ratio. B) the required rate of return on the firm's underlying assets. C) the return of the market index. D) Both A and B.
D
The optimal capital structure of a firm A) minimizes the cost of financing the firm's projects. B) minimizes interest payments to creditors. C) maximizes overall value of the firm. D) Both A and C.
D
