Valuation Final Practice

The maximum amount of equity that can be raised through crowdfunding in a 12-month period is: A. $1 million. B. $25 million. C. $10 million. D. $50 million. E. $100 million.

$50 million.

Mary owns 100 percent of a gift shop with an equity value of $150,000. If she keeps the shop open 5 days a week, EBIT is $75,000. If the shop remains open 6 days a week, EBIT increases to $92,000 annually. Mary needs an additional $50,000 which she can raise today by either selling stock or issuing debt at an interest rate of 7 percent. The principal amount would be repaid in equal annual payments at the end of the next five years. Ignore taxes. What will be the cash flow for the year to Mary if she issues debt, remains open 5 days a week, and distributes all the residual cash flow to the shareholders? A. $67,880 B. $46,125 C. $65,000 D. $61,500 E. $71,500

$61,500

Jelco has a target debt-to-value ratio of .55. The pretax cost of debt is 8.6 percent, the assumed tax rate is 24 percent, and the unlevered cost of equity 13.4 percent. What is the target cost of equity? A. 14.09 percent B. 16.48 percent C. 17.86 percent D. 15.72 percent E. 15.12 percent

17.86 percent

A global conglomerate has a debt beta of zero. If the cost of equity is 12.23 percent, and the risk-free rate is 4.36 percent, what is the firm's pretax cost of debt? A. 0 percent B. 8.30 percent C. 12.23 percent D. 7.87 percent E. 4.36 percent

4.36 percent

A classified board is: A. a board where only a portion of the directors are elected in any one year. B. a communication network that distributes resumes for potential board candidates. C. a listing of criteria that a firm is seeking for a targeted purchase. D. the inclusion a super majority provision to prevent a small number of directors from exerting total control over the board's decisions. E. a communication network that identifies firms that are willing to be acquired

A. a board where only a portion of the directors are elected in any one year.

In calculating NPV using the flow-to-equity approach the discount rate is the: A. cost of equity for the levered firm. B. all-equity cost of capital minus the weighted average cost of debt. C. all-equity cost of capital. D. weighted average cost of capital. E. all-equity cost of capital plus the weighted average cost of debt.

A. cost of equity for the levered firm.

Venture capitalists will frequently: A. hold voting preferred stock which grants them priorities in the event of a sale or liquidation. B. hold voting common stock which grants them priorities over the debt holders. C. hold nonvoting preferred stock. D. hold nonvoting common stock. E. obtain seats on the board but not obtain shares of stock.

A. hold voting preferred stock which grants them priorities in the event of a sale or liquidation.

Venture capitalists are: A. intermediaries that raise funds from outside investors. B. investors who take a hands-off approach to investment management. C. generally interested in primarily long-term investments. D. easily contacted and tend to assist with most requests received. E. generally granted a maximum of 25 percent of a firm's equity.

A. intermediaries that raise funds from outside investors.

In a world with taxes and financial distress, when a firm is operating with the optimal capital structure the: A. overall benefits of debt have all been realized. B. weighted average cost of capital will be maximized. C. firm will be all-equity financed. D. required return on assets will be at its maximum point. E. debt-equity ratio will be minimized.

A. overall benefits of debt have all been realized.

To determine the total value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the number of rights issued, the: A. subscription price and the number of rights needed to acquire a new share. B. current market price per share and the number of rights needed to acquire a new share. C. current market price per share and the standby fee. D. detachment date and the subscription price. E. the number of rights needed to acquire a new share and the number of shares currently owned.

A. subscription price and the number of rights needed to acquire a new share.

When a building supply store acquires a lumber mill it is making a ______ acquisition. A. vertical B. horizontal C. conglomerate D. complementary resources E. longitudinal

A. vertical

The Boat Company has a capital structure of 30 percent riskless debt and 70 percent equity. The assumed tax rate is 23 percent. If the asset beta is .9, what is the equity beta? A.1.20 B. 1.26 C. .63 D. 1.49 E. .41

A.1.20

When the debt-equity ratio changes over time, the best method(s) to use when evaluating a project is(are): A. FTE. B. either APV or WACC. C. either FTE or WACC. D. WACC. E. APV.

APV

Which method(s) is(are) most applicable if a project's debt level is known over the life of the project? A. WACC B. Either FTE or WACC C. FTE D. Either APV or FTE E. APV

APV

Which one of the following is not one of the four main functions provided by underwriters? A. Assumption of some market risk B. Responsibility for marketing securities C. Auditing the financial statements D. Estimating the value of an offering E. Establishing the offer price

Auditing the financial statements

Under the _______ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _______ method, the underwriter does not purchase the shares but merely acts as an agent. A. best efforts; firm commitment B. firm commitment; best efforts C. general cash offer; best efforts D. competitive offer; negotiated offer E. seasoned; unseasoned

B. firm commitment; best efforts

An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace the current board of directors is called a: A. tender offer. B. proxy contest. C. going-private transaction. D. leveraged buyout. E. consolidation.

B. proxy contest

Assume the corporate tax rate is 22 percent, the personal tax rate on interest income is 15 percent, and the personal tax rate on dividends is 10 percent. Also assume the firm earns $5 per share in taxable income and pays out 40 percent of its earnings. How much will a shareholder receive per share in aftertax income? A. $1.782 B. $1.404 C. $1.232 D. $1.470 E. $1.096

B. $1.404

Assume a stock has an ex-rights price of $32. The rights offer has a requirement of 3 rights per new share and a subscription price of $30. What is the rights-on stock price? A. $28.06 B. $32.67 C. $42.00 D. $40.94 E. $38.33

B. $32.67

One company wishes to acquire another. Which one of the following does not require a formal vote by the shareholders of the acquired firm? A. A horizontal acquisition of assets B. An acquisition of stock C. A consolidation D. A vertical acquisition of assets E. A merger

B. An acquisition of stock

The price at which offered securities are sold in a Dutch auction underwriting is determined by the: A. lead underwriter. B. bidders. C. SEC. D. issuing firm. E. venture capitalists.

B. bidders.

Covenants restricting additional borrowings primarily protect the: A. managers by avoiding agency costs. B. debtholders from the added risk of dilution of their claims. C. shareholders' residual interests in the firm. D. shareholders from agency costs. E. debtholders from changes in market interest rates.

B. debtholders from the added risk of dilution of their claims.

Studies have found that firms with large investments in tangible assets tend to have: A. zero debt. B. high leverage. C. less debt. D. about the same debt-equity ratios and firms with small investments in tangible assets. E. the same capital structure as the average firm in the overall market.

B. high leverage.

When firms issue more debt, the present value of the tax shield on debt _____ while the present value of financial distress costs: A. decreases; decreases. B. increases; increases. C. decreases; remains constant. D. decreases; increases. E. increases; remains constant.

B. increases; increases.

Dilution commonly refers to the: A. increase in stock value due to wider ownership of stock. B. loss in existing shareholder's value. C. loss in new shareholder's equity. D. splitting of a single share of stock into multiple shares. E. issuance of debt to repurchase shares.

B. loss in existing shareholder's value.

The cost of equity should be lowest when the debt-to-equity ratio is: A. .25. B. zero. C. 1.00. D. .50. E. .20.

B. zero.

A business deal in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group is called a: A. tender offer. B. proxy contest. C. going-private transaction. D. acquisition. E. consolidation.

C. going-private transaction

The payment made by a firm to repurchase shares of its outstanding stock from an individual investor in an attempt to eliminate a potential unfriendly takeover attempt are referred to as: A. a golden parachute. B. standstill payments. C. greenmail. D. a poison pill. E. a white knight.

C. greenmail.

A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a: A. golden suitor. B. poison put. C. white knight. D. shark repellent. E. crown jewel.

C. white knight.

Jensen's has a total value of $548,000 and debt valued at $262,000. What is the weighted average cost of capital if the aftertax cost of debt is 7.2 percent and the cost of equity is 12.6 percent? A. 12.13 percent B. 11.48 percent C. 10.02 percent D. 11.13 percent E. 10.88 percent

C. 10.02 percent

Filter Corp. maintains a debt-equity ratio of .45. The cost of equity is 14.7 percent, the pretax cost of debt is 8.1 percent, and the tax rate is assumed to be 23 percent. What is the weighted average cost of capital? A. 14.12 percent B. 8.38 percent C. 12.07 percent D. 11.02 percent E. 13.00 percent

C. 12.07 percent

Which one of the following is not one of the four main functions provided by underwriters? A. Assumption of some market risk B. Responsibility for marketing securities C. Auditing the financial statements D. Estimating the value of an offering E. Establishing the offer price

C. Auditing the financial statements

Shareholders sometimes pursue selfish strategies when financial distress is present. These actions generally result in: A. lower agency costs, as shareholders have more control over the firm's assets. B. investments with risks similar to those of the current firm. C. agency costs to bondholders. D. no action by debtholders since these are shareholder concerns. E. undertaking scale-enhancing projects.

C. agency costs to bondholders.

A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a: A. tender offer. B. merger. C. leveraged buyout. D. consolidation. E. proxy contest.

C. leveraged buyout.

Debt capacity is often offered as a reason for a stock price to decline when additional equity securities are issued. The primary reason that supports this argument is that: A. the high issue costs of a debt offering must be paid by the shareholders. B. an additional equity issue reduces the debt capacity of a firm. C. management feels the probability of default has risen, which limits the firm's debt capacity and thus an equity issue is necessary. D. unless additional debt is issued in the future, stock dividends will tend to decline after the new securities are issued. E. additional equity is only issued when a firm cannot meet its current debt obligations, thereby signaling the firm is on the verge of bankruptcy.

C. management feels the probability of default has risen, which limits the firm's debt capacity and thus an equity issue is necessary.

If existing shareholders are offered rights to a new issue of securities, those shareholders: A. will receive additional shares at no additional cost to themselves. B. will need to pay the current market price per share on the day they tend their rights. C. must participate in the offering if they wish to maintain their current ownership position. D. will pay the book price per share for each share obtained through the rights process. E. should expect to receive the book value per share for each right they have been granted.

C. must participate in the offering if they wish to maintain their current ownership position.

he term (RBB) represents the: A. weighted average cost of capital. B. average pretax cost of equity. C. pretax interest payment. D. pretax cost of equity dividends. E. aftertax cost of debt.

C. pretax interest payment.

n attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace the current board of directors is called a: A. tender offer. B. going-private transaction. C. proxy contest. D. consolidation. E. leveraged buyout.

C. proxy contest.

A proposed acquisition may create synergy by doing all the following except: A. improving the distribution network of the acquiring firm. B. providing the combined firm with a strategic advantage. C. reducing the utilization of the acquiring firm's assets. D. increasing the market power of the combined firm. E. reducing the acquiring firm's distribution costs.

C. reducing the utilization of the acquiring firm's assets.

A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a: A. greenmail provision. B. poison pill amendment. C. standstill agreement. D. supermajority amendment. E. white knight provision.

C. standstill agreement.

A financial device designed to make unfriendly takeover attempts financially unappealing, if not impossible, is called: A. a golden parachute. B. a standstill agreement. C. greenmail. D. a poison pill. E. a white knight.

D. a poison pill.

A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a: A. tender offer. B. proxy contest. C. merger. D. leveraged buyout. E. consolidation.

D. leveraged buyout.

Management's first step in any issue of securities to the public is: A. to file a registration form with the SEC B. to distribute copies of the preliminary prospectus C. to distribute copies of the final prospectus D. to obtain approval from the board of directors E. to prepare the tombstone advertisement

D. to obtain approval from the board of directors

Winston's has a beta of 1.08 and a cost of debt of 8 percent. The current risk-free rate is 3.2 percent and the market rate of return is 11.47 percent. What is the company's cost of equity capital? A. 16.93 percent BB. 16.13 percent C. 8.93 percent D. 12.13 percent E. 20.13 percent

D. 12.13 percent

Which one of these best exemplifies "milking the property"? A. An all-equity firm repurchasing shares B. A firm with high financial distress using expected dividends to repay debt C. A firm demanding a premium to be acquired without a proxy fight D. A firm with high financial distress paying additional dividends E. A firm paying a premium to acquire a competitor

D. A firm with high financial distress paying additional dividends

Which one of the following is a direct, rather than an indirect, cost of financial distress? A. Loss of a key supplier due to late payments to that supplier B. Money spent to send a mailing to customers dispelling any and all financial distress concerns about the company C. Key employee leaving for another job due to concerns over job security given the company's financial status D. Fees paid to financial advisors related to bankruptcy matters E. Loss of customers due to concerns the company will close

D. Fees paid to financial advisors related to bankruptcy matters

A decrease in a firm's level of debt tends to imply: A. an increase in the firm's market value. B. a decrease in the firm's position within its industry. C. an increase in future dividend payouts. D. a decrease in the firm's stock price. E. a decline in managerial efficiency.

D. a decrease in the firm's stock price.

In a merger the: A. acquiring firm acquires the assets but not the liabilities of the target firm. B. legal status of both the acquiring firm and the target firm is terminated. C. stockholders of the target firm have little, if any, say as to whether or not the merger occurs. D. acquiring firm retains its name and legal status. E. target firm always continues to exist as a subsidiary of the acquiring firm.

D. acquiring firm retains its name and legal status.

Flotation costs: A. are amortized using a declining-balance method over the life of the loan. B. are deducted as a business expense in the year incurred. C. cannot be deducted as a business expense. D. are amortized using the straight-line method over the life of the loan. E. are deducted as a business expense at the time the loan is repaid in full.

D. are amortized using the straight-line method over the life of the loan.

The optimal capital structure will tend to include more debt for firms with: A. the highest depreciation deductions. B. the lowest marginal tax rate. C. substantial tax shields from other sources. D. lower probability of financial distress. E. less taxable income.

D. lower probability of financial distress.

Many firms base their capital structure decisions on which two factors? A. industry averages and tax rates B. interest and tax rates C. need for financial slack and current interest rates D. need for financial slack and industry averages E. types of assets held and current interest rates

D. need for financial slack and industry averages

The green shoe option is used to: A. cover oversubscription. B. cover excess demand. C. provide additional reward to the investment banker for a risky issue. D. provide additional reward to the issuing firm for a risky issue. E. Both cover oversubscription and cover excess demand.

E. Both cover oversubscription and cover excess demand.

A project has an initial cost of $480,000, projected revenue of $311,500, cash costs of $214,650, an unlimited life, a tax rate of 21 percent, and a weighted average cost of capital of 13.8 percent. What is the net present value of the project? A. $100,003 B. $66,497 C. $24,411 D. $115,494 E. $74,431

E. $74,431

Which of these methods discount levered cash flows? A. both APV and WACC B. WACC C. both APV and FTE D. APV E. FTE

E. FTE

Which one of these is most related to a positive covenant? A. Not issuing any additional long-term debt B. Avoiding a merger while a debt remains unpaid C. Limiting the amount of the firm's dividends D. Not selling any major assets without lender approval E. Furnishing financial statements to the firm's lenders

E. Furnishing financial statements to the firm's lenders

A tender offer generally offers a price that is ___ the current market price for a ___ number of shares. A. above; minimum B. below; maximum C. equal to; maximum D. equal to; minimum E. above; maximum

E. above; maximum

Assume a merger of two unlevered firms produced no synergy. In this case: A. the shareholders of both firms would realize equal gains. B. the acquiring firm's shareholders would gain while the acquired firm's shareholders would lose. C. the diversification effect would only benefit the acquired firm's shareholders. D. the acquired firm's shareholders would gain at the expense of the acquiring firm's shareholders. E. all shareholders would fail to realize any benefits.

E. all shareholders would fail to realize any benefits.

The optimal capital structure has been achieved when the: A. debt-equity ratio is equal to 1. B. debt-equity ratio is such that the cost of debt exceeds the cost of equity. C. cost of equity is maximized given a pretax cost of debt. D. weight of equity is equal to the weight of debt. E. present value of the financial distress costs equals the present value of the tax shield on debt.

E. present value of the financial distress costs equals the present value of the tax shield on debt.

Assume a firm issued rights to fund a new project. If this project immediately increases the market value per share, then: A. no dilution of ownership position can occur. B. the book value per share had to remain constant. C. the EPS will also immediately increase. D. the shareholders will be worse off than before, whether or not they participate in the offering. E. the firm has acted in the best interest of its pre-rights shareholders.

E. the firm has acted in the best interest of its pre-rights shareholders.

The pecking order states that firms should: A. always issue debt so the market won't know when managers believe the stock is overvalued. B. issue new equity first. C. always issue equity to avoid financial distress costs. D. issue debt first. E. use internal financing first.

E. use internal financing first.

Which one of the following statements concerning mergers and acquisitions is correct? A. Acquisitions always result in at least one firm being dissolved. B. Acquisitions of assets are generally quite simple and inexpensive from a legal and accounting perspective. C. The net present value of an acquisition should have no bearing on whether or not the acquisition occurs. D. At least one-half of the shareholders must vote to approve an acquisition of stock. E. Generally, two-thirds of the shareholders in each firm must approve a merger.

Generally, two-thirds of the shareholders in each firm must approve a merger

The cost of equity for an all-equity firm is designated as: A. RD. B. R0. C. R0(1 − tC). D. RS(1 − tC). E. Rs.

R0

____ can provide a potential tax gain from an acquisition. A. A reduction in the level of debt B. A decreased use of leverage C. Increased diseconomies of scale D. The combining of multi-state operations E. An increase in surplus funds

The combining of multi-state operations

Which one of these statements is correct? A. Flotation costs increase the value of RS. B. The cost of equity for an all-equity firm is less than the cost of equity for a levered firm. C. The weighted average cost of capital is equal to B/S(RS)(1 − Tc). D. The cost of levered equity is indirectly related to beta. E. The discount rate for levered equity is unaffected by the debt-equity ratio.

The cost of equity for an all-equity firm is less than the cost of equity for a levered firm.

A registration statement is effective on the 20th day after filing unless: A. the SEC is backlogged with statements. B. a tombstone ad is issued indicating its demise. C. a letter of comment suggesting changes is issued by the SEC. D. a syndicate can be formed sooner. E. the issue exceeds $50 million in which case the wait period is 30 days.

a letter of comment suggesting changes is issued by the SEC.

The appropriate cost of debt to the firm is the: A. aftertax coupon rate. B. aftertax market borrowing rate. C. pretax market cost of debt. D. pretax coupon rate. E. levered equity rate.

aftertax market borrowing rate.

Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for this financing, venture capitalists generally receive: A. the personal financial guarantees of all current owners. B. an equity position and board of director positions. C. the right to set the offer price in any future initial public offering. D. the protection provided by a court-appointed trustee. E. a government-funded guarantee of repayment for all funds provided.

an equity position and board of director positions.

The price at which offered securities are sold in a Dutch auction underwriting is determined by the: A. lead underwriter. B. bidders. C. SEC. D. issuing firm. E. venture capitalists.

bidders.

The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n): A.counter-tender offer. B. spin-off. C. carve-out. D. split-up. E. white knight gift.

carve-out

The acquisition of a firm whose business is not related to that of the bidder is called a _____ acquisition. A. vertical B. conglomerate C. horizontal D. forward E. backward

conglomerate

If you discount a project's expected future unlevered aftertax cash flows by the _____ and then subtract the initial investment you will calculate the: A. cost of capital for the unlevered firm; all-equity net present value. B. weighted cost of capital; project NPV. C. cost of equity capital for the levered firm; all-equity net present value. D. cost of equity capital; project NPV. E. cost of capital for the unlevered firm; adjusted present value.

cost of capital for the unlevered firm; all-equity net present value.

The APV method is comprised of the all-equity NPV of a project plus the NPV of financing effects. The four financing side effects are: A. tax subsidy of dividends, cost of issuing new securities, subsidy of financial distress, and cost of debt financing. B. cost of issuing new securities, cost of financial distress, tax subsidy of debt, and other subsidies to debt financing. C. cost of issuing new securities, cost of financial distress, tax subsidy of dividends, and cost of debt financing. D. subsidy of financial distress, tax subsidy of debt, cost of other debt financing, and cost of issuing new securities. E. cost of financial distress, tax subsidy of debt, increased cost of equity capital, and cost of issuing new securities.

cost of issuing new securities, cost of financial distress, tax subsidy of debt, and other subsidies to debt financing.

The explicit costs, such as the legal expenses, associated with corporate default are classified as: A. indirect bankruptcy costs. B. direct costs of financial distress. C. debt flotation costs. D. unlevered costs of capital. E. beta conversion costs.

direct costs of financial distress.

The flow-to-equity (FTE) approach in capital budgeting is defined as the : A. discounting of all project cash flows at the overall cost of capital. B. scale enhancing discount process. C. discounting of a project's levered cash flows to the equityholders at the required return on equity. D. dividends and capital gains that may flow to shareholders of a firm. E. discounting of a project's unlevered cash flows to the equityholders at the WACC.

discounting of a project's levered cash flows to the equityholders at the required return on equity

A business deal in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group is called a: A. acquisition. B. tender offer. C. proxy contest. D. going-private transaction. E. consolidation.

going-private transaction.

Generous compensation packages paid to a firm's top managers in the event of a takeover are referred to as: A. golden parachutes. B. shark repellents. C. bear hugs. D. white knights. E. poison puts.

golden parachutes

All the following are major requirements needed to qualify for shelf registration except: A. having a current rating of investment grade. B. having outstanding stock with a market value in excess of $150 million. C. not defaulting on debt in the past three years. D. having no violations of the Securities Act of 1933 in the past three years. E. having no violations of the Securities Exchange Act of 1934 in the past three years.

having no violations of the Securities Act of 1933 in the past three years.

Studies have found that firms with large investments in tangible assets tend to have: A. the same capital structure as firms that specialize in intangible asset investments. B. the highest financial distress costs of any firm per dollar of debt. C. higher financial distress costs than firms with comparable investments in intangible assets. D. higher target debt-equity ratios than firms that primarily invest in intangible assets. E. zero debt.

higher target debt-equity ratios than firms that primarily invest in intangible assets.

When evaluating an acquisition, you should: A. include synergies. B. focus on the total cash flows of the merged firm. C. ignore any potential changes in management. D. ignore any one-time acquisition fees or transaction costs. E. concentrate on book values and ignore market values.

include synergies

The two sources of value created by an LBO are: A. the tax benefit of debt and increased sales. B. lower interest expenses and increased efficiency. C. lower tax and interest payments. D. increased efficiency and the interest tax shield. E. lower taxes and lower dividends.

increased efficiency and the interest tax shield.

Venture capitalists are: A. intermediaries that raise funds from outside investors. B. investors who take a hands-off approach to investment management. C. generally interested in primarily long-term investments. D. easily contacted and tend to assist with most requests received. E. generally granted a maximum of 25 percent of a firm's equity.

intermediaries that raise funds from outside investors.

Dilution commonly refers to the: A.increase in stock value due to wider ownership of stock. B.loss in existing shareholder's value. C. loss in new shareholder's equity. D. splitting of a single share of stock into multiple shares. E. issuance of debt to repurchase shares.

loss in existing shareholder's value.

The optimal capital structure of a firm _____ the marketable claims and _____ the nonmarketable claims against the cash flows of the firm. A. equates; (leave blank) B. maximizes; maximizes C. minimizes; minimizes D. minimizes; maximizes E. maximizes; minimizes

maximizes; minimizes

A proposed acquisition may create synergy by doing all the following except: A. reducing the utilization of the acquiring firm's assets. B. improving the distribution network of the acquiring firm. C. reducing the acquiring firm's distribution costs. D. increasing the market power of the combined firm. E. providing the combined firm with a strategic advantage.

reducing the utilization of the acquiring firm's assets. improving the distribution network of the acquiring firm

Negotiated offers generally: A. are used as a last resort. B. involve an underwriting syndicate. C. result in higher issue costs than do competitive offers. D. involve only large issuers. E. reduce the probability an issue will be successful.

result in higher issue costs than do competitive offers.

The type(s) of dilution that are most relevant to a firm's shareholders when the firm's shares are issued with rights is(are) the dilution of: A. percentage ownership. B. stock price per share. C. both book value per share and earnings per share. D. both percentage ownership and book value per share. E. both stock price per share and earnings per share.

stock price per share.

One of the indirect costs of bankruptcy is the effect that a potential bankruptcy has on the firm's decisions. The general result is that: bondholders expropriate value from stockholders by selecting high-risk projects. A. stockholders expropriate value from bondholders by selecting high-risk projects. B. the firm will rank all projects and select the project which results in C. the highest expected firm value. D. the firm will select only all-equity financed projects. E. the firm will always select the lowest-risk project available.

stockholders expropriate value from bondholders by selecting high-risk projects.

The introduction of personal taxes may reveal a disadvantage to the use of corporate debt if the personal tax rate on: A. interest income is zero. B. the distribution of income to stockholders is equal to the personal tax rate on interest income. C. the distribution of income to stockholders is greater than the personal tax rate on interest income. D. the distribution of income to stockholders is less than the personal tax rate on interest income. E. dividends and interest are equal.

the distribution of income to stockholders is less than the personal tax rate on interest income.

Issuing debt instead of new equity in a closely held firm is most apt to cause: A. both more shirking and perquisite consumption since the government provides a tax shield on debt. B. the owner-manager to work less hard and shirk duties. C. agency costs to fall as owner-managers do not need to worry about other shareholders. D. the owner-manager to consume more perquisites because the cost is passed to the debtholders. E. the owner-manager to reduce shirking and perquisite consumption.

the owner-manager to reduce shirking and perquisite consumption.

Corporations in the U.S., as compared to other countries, tend to: A. have relatively high leverage ratios due to the tax benefits gained. B. have a median leverage ratio that's equal to the average international median leverage ratio. C. have extremely high debt-equity ratios. D. underutilize debt. E. rely less on equity financing than they should.

underutilize debt.

The acquisition of a firm involved with a different production process stage then the bidder is called a _____ acquisition. A. vertical B. conglomerate C. backward D. horizontal E. forward

vertical