BUSI 530 - part 3

Select all that apply The dividend discount model works if the firm offers distributions in the form of

cash dividends share repurchases

The cost of processing checks has been reduced by a technological innovation known as

check conversion.

A procedure to determine the likelihood a customer will pay its bills is known as

credit analysis.

When a firm pays a dividend, their price per share _________ by the amount of the dividend.

decreases

If a firm is very heavily debt financed, all of its operating income may go to paying interest on debt, thereby:

eliminating any advantage of interest tax shields

A U.S. firm deposits dollars into a bank account in France. This deposit is known as a:

eurodollar deposit

Equity investment in high-risk, high-tech start-up private companies is called:

venture capital

Current assets and liabilities are known as:

working capital

Statistically, the number of firms that provide venture capitalists with the large payoff they require is approximately _______.

1 in 10

Select all that apply Which of the following are considered sources of short-term financing?

Bank loan Stretching payables

Match the financial plan component on the right with the appropriate definition on the left.

Choice, Current financial statements and forecasts about the future. Current financial statements and forecasts about the future. Outputs matches Choice, Pro-forma financial statements and financial ratios. Pro-forma financial statements and financial ratios. Planning Model matches Choice, Equations relating output variables to forecasts. Equations relating output variables to forecasts.

Select all that apply Which of the following are important money market instruments?

Commercial paper Treasury bills Certificates of deposit

Select all that apply Which of the following can be used to carry out a credit analysis?

Credit agencies The company's bank Moody's rating for the customer's bonds

Which of the following statements about the impact of financial leverage on the firm's percentage stock returns is correct?

Debt increases uncertainty in the returns

Which of the following relates to long-term planning, but not short-term planning?

Planning horizon of 5 years or more

Select all that apply Corporate money market investments offer higher yields than U.S. government securities because:

Treasury bills are highly liquid the risk of default is higher for corporations

When firms need short-term financing, which strategy is most common?

Use a bank loan up to its limit, then stretch payables if necessary

Select all that apply Inventory consists of which of the following?

Work in process Raw materials Finished goods

Most firms in the U.S. have the largest portion of current assets in:

accounts receivable and inventory

Standards set to determine the amount and nature of credit to extend to customers is known as:

credit policy

An equity issue that makes a privately owned firm public is called a(n):

initial public offering

Shelf registration is more often used for the:

issue of corporate bonds

A private placement allows a firm to sell securities to:

knowledgeable investors only

Firms generally have ______ net working capital.

positive

When a company puts off paying its bills, it is using a form of short-term financing called:

stretching payables

The financial manager should hold cash balances up until the point that:

the marginal value of liquidity equals the value of interest foregone

When a firm is unable to make interest payments on its debt, the firm is said to be blank 1.

Blank 1: bankrupt

Financial planners often use financial planning blank1 to help them explore consequences of alternative strategies.

Blank 1: models

A market for short-term financial assets in the U.S. is known as a blank1 market.

Blank 1: money

When financial managers forecast future sources and uses of cash they must first create a blank1 forecast.

Blank 1: sales

The tendency for the stock price to decline at time of issue may have nothing to do with increased blank1 ; it is more likely resulting from well-informed managers believing the market blank2 the stock.

Blank 1: supply Blank 2: overpriced

If a firm pays for a dividend by issuing additional shares of stock, it's total firm value will be blank1.

Blank 1: unchanged or constant

Match the draft on the left with the appropriate definition on the right.

Commercial draft matches Choice, An order to pay. An order to pay. Sight draft matches Choice, An immediate order to pay. An immediate order to pay. Time draft matches Choice, An order to pay within a specified amount of time. An order to pay within a specified amount of time.

Select all that apply Which of the following represent the two main sources of a company's accounts receivable?

Consumer credit Trade credit

Select all that apply Besides checks, which of the following are methods of paying bills?

Credit card Debit card Direct payment

Select all that apply Which of the following are purposes for forecasting future sources and uses of cash?

Ensure the firm can pay its bills Alert managers to future cash needs

Select all that apply Which of the following are characteristic of money market funds?

Maturities less than 1 year. Low risk. Liquid.

Select all that apply Which of the following are three of the banks that dominate the underwriting industry in the United States?

Morgan Stanley Bank of America Merrill Lynch Goldman Sachs

An agreement whereby sales are made with no formal debt contract.

Open account

A planning model in which sales forecasts are the driving variables and most other variables are proportional to sales.

Percentage of sales model

Select all that apply Which of the following are components included in financial plans?

Planning model Outputs Inputs

Which of the following statements best describes shelf registration?

The provision that allows large companies to file a single registration statement covering financing plans for up to 3 years.

Holdings of marketable securities are best at at what investment for a taxpaying firm?

Zero-NPV

The most common source of short-term financing for firms is:

a bank loan

The three roles usually played by underwriters for their client companies are _______, ________ and ________.

adviser; stock buyer; stock reseller

A company extending credit to customers and other companies requires payment of the goods

after delivery.

Select all that apply A sales forecast enables financial mangers to determine

anticipated sales inventory levels collections of accounts receivable

When a firm repurchases stock by allowing shareholders to submit offers declaring how many shares they would sell at each price within a range, this is called a(n) _________.

auction

When a decline in assets makes it impossible for a firm to repay its debts, the creditors may use the legal mechanism of ________ to take over the firm.

bankruptcy

When a company produces goods to a customer's specifications or incurs heavy delivery costs, the company may require payment of the goods

before delivery.

In a firm's income statement, interest payments on debt are deducted _________ corporate taxes are calculated, which _______ the firm's tax liability.

before; reduces

The asset with the most liquidity is:

cash

Procedures to collect and monitor receivables are known as a firm's

collection policy.

Select all that apply Having financial slack means having ready access to which of the following items?

debt markets bank financing marketable securities cash

MM's proposition II states that the required rate of return on equity increases as the firm's ________ increases.

debt-equity ratio

The value of a firm is the sum of the market value of its _______ plus the market value of its _______.

debt; equity

One answer to the free cash-flow problem is for the firm to issue more ______ to commit cash flows and focus management's attention on avoiding _______.

debt; financial distress

Financial distress can increase a firm's cost of ______ while reducing the firm's _______.

debt; value

Following the 2007-2008 financial crisis, the market for commercial paper has:

declined dramatically

Ignoring financial distress, the tax shield of debt _______ the firm's WACC as the debt-equity ratio increases.

decreases

The date after which a purchaser of stock is not eligible to receive the declared dividend is the _______.

ex-dividend date

True or false: All forecasted variables will be proportional to the level of sales.

false

Another term commonly used for debt is _________.

financial leverage

According to MM, as long as a shareholder can borrow or lend on the same terms as the firm, the shareholder will be indifferent between _____ debt and ______ debt.

firm; shareholder

Select all that apply As growth rates increase, more funds may be needed to pay for additions to the following:

fixed assets working capital

With a money market investment, returns are always ______ than the discount because you pay ______ than face value when purchasing the bond.

higher, less

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

initial public offering

If the firm is a short-term lender

long-term financing is greater than the cumulative capital requirement

If the firm is a short-term borrower

long-term financing is less than the cumulative capital requirement

A company's financial planners expect sales to increase by 20% over the next year and expect costs to be a fixed proportion of sales. Given this information, the financial planners will use the _____ model.

percentage of sales

Financial slack is most valuable to firms with plenty of _________ opportunities.

positive NPV growth

When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, etc., it is called a(an):

private placement

If investors pay a higher tax rate on dividends than on capital gains, then investors should prefer firms that _____ over firms that ______.

repurchase shares; pay dividends

The financial statement used to report changes that took place in the cash account is the

statement of cash flows

A distribution of additional shares to a firm's stockholders is called a:

stock dividend

The group of underwriters that is assembled to sell a very large issue of stock is referred to as a ________.

syndicate

Credit, discount, and payment terms offered on a sale is known as

terms of sale.

Select all that apply Which of the following statements describes firm behavior consistent with the meaning of financial restructuring?

the firm issues debt in order to repurchase an equal amount of equity the firms issues equity in order to repay an equal amount of debt

Select all that apply Which of the following would be signs that a firm is experiencing financial distress?

the firm struggles to pay its suppliers on time the firm's debt is downgraded to a lower credit rating the firm fails to make an interest payment on its debt

Select all that apply Which of the following are ways that firms pay out cash to shareholders?

Pay cash dividends Repurchase shares

One of the advantages of capital gains over dividends is that taxes on dividends must be paid immediately, while taxes on capital gains ________.

may be deferred until the stock is sold

When a firm repurchases stock by offering to buy back a stated number of shares at a fixed price, this is a(n) ________.

tender offer

Mahan Corporation anticipates an expected growth rate of 10%. The corporation currently has $100,000 in assets and $4,500 of reinvested earnings. The amount of required external financing is _____.

$5,500 Reason: Required external financing = New Investment - reinvested earnings = (.10 x $100,000) - $4,500 = $5,500

Mahan Corporation anticipates an expected growth rate of 20%. The corporation currently has $30,000 in assets. The amount of the new investment is _____.

$6,000 Reason: New Investment = Growth rate x Initial assets .20 x $30,000 = $6,000

A consequence of MM proposition I with taxes is that the maximum value of the firm occurs when the firm is financed with _______ percent debt.

100

Mahan Corporation ended the year with $70,000 of sales and $35,000 of net assets. The corporation's managers forecast that sales will increase by 10% in the coming year. The corporation has reinvested earnings of $2,000. Assuming the ratio of net assets to sales remains constant, the corporation's required external financing will be _____.

1500 Reason: The increase in sales will be $70,000 x .1 = $7,000. Required external financing = (net assets/sales) x increase in sales - reinvested earnings: ($35,000/$70,000) x .$7,000 - $2,000 = $1,500

Select all that apply Which of the following are benefits of building financial plans?

All strategic growth options can be considered The ability to adapt to unfolding events Forces consistency

Select all that apply The financial statement of cash flows shows the increases and decreases in cash corresponding to which of the following activities?

Financing Investing Operating

Select all that apply Which of the following are restrictions that state law may place on the payment of dividends?

Firms may not pay dividends if doing so would cut into legal capital. Firms may not pay dividends if doing so would make them insolvent.

True or false: Using a bank loan to its limit is typically preferable to stretching payables.

True

True or false: flotation costs are higher for issuing equity than for issuing debt.

True

True or false: the advantage of the bookbuilding method is that it allows underwriters to reward investors whose bids are most helpful in setting the issue price.

True

Select all that apply According to MM proposition I with taxes, the value of the firm ________ as the debt-equity ratio ________.

decreases; decreases increases; increases

Annie's employer pays her electronically through _________. Annie pays her recurring bills such as her utility bills and credit card through an electronic ___________ system.

direct deposit, direct payment

In order to accommodate share repurchases by a dividend paying firm, the Dividend Discount Model must use ________ for its cash flows.

dividends per share

Major international banks in London lend dollars to one another at the ___________.

dollar LIBOR

Select all that apply Which of the following statements about the interest tax shield is true?

firms that do not pay taxes do not benefit from the tax shield of debt the higher the firm's before-tax cost of debt, the higher the value of the tax shield the higher the firm's corporate tax rate, the higher the value of the tax shield

Financial planning models help the manager to develop consistent blank1 of crucial financial variables

forecasts

Due to asymmetric information between management and investors, the announcement of a new stock issue will be interpreted by investors as a signal that the firm's stock is ________.

overpriced

Stock prices decline at the announcement of a new issue because investors believe that managers are signaling that the stock price is currently __________.

overpriced

Ignoring taxes and market imperfections, the total wealth of shareholders is _______ if the firm distributes cash by dividends rather than by repurchases.

the same

Select all that apply Providers of venture capital are: Multiple select question. savings banks wealthy individuals the Federal Reserve Bank mature corporations looking for new technology pension funds specialist venture capital firms

wealthy individuals mature corporations looking for new technology pension funds specialist venture capital firms

Select all that apply Which of the following are forms of electronic payment?

wire transfers direct payments direct deposits credit cards debit cards

Alpha Corporation has annual interest payments on its debt of $70,000. Its corporate tax rate is 40%. What is Alpha's interest tax shield?

$28,000

Mahan Corporation ended the year with $70,000 of sales and $35,000 of net assets. The corporation's managers forecast that sales will increase by 10% in the coming year. The corporation has no earnings to reinvest. Assuming the ratio of net assets to sales remains constant, the corporation's required external financing will be _____.

$3,500 Reason: The increase in sales will be $70,000 x .1 = $7,000. Required external financing = (net assets/sales) x increase in sales - reinvested earnings: ($35,000/$70,000) x .$7,000 - $0 = $3,500

Starting in 2018, the United States moved to a territorial system with a corporate tax rate of:

21%

The top tax rate on both dividends and capital gains is ______.

23.8%

Which of the following expressions is added to the weighted-average cost of capital equation to account for interest paid on debt?

(1 - Tc) x rdebt

Click and drag on elements in order Rank the following in order of riskiest to least risky: Treasury Bonds, Treasury Bills, Corporate Bonds.

1 Corporate Bonds 2 Treasury Bonds 3 Treasury Bills

Click and drag on elements in order What is the correct order of steps to follow for determining credit for a customer?

1 fix the terms of sale 2 determine whether to sell on open account or have a customer sign an IOU 3 use credit analysis to determine probability that customer will pay 4 determine credit policy

Corporations prefer dividends because they are only taxed on _____ percent of dividends they receive on the stock they own in other firms.

30

If Nuka-Cola Inc declared a stock dividend of 20%, John-Caleb would receive blank1 new shares if he currently owned 20,000 shares.

Blank 1: 4000

Match the benefit of financial plans on the right with the appropriate description on the left.

Contingency Planning matches Choice, Planning for unlikely events Planning for unlikely events Considering Options matches Choice, Looking for opportunities for the company to exploit its strengths Looking for opportunities for the company to exploit its strengths Forcing Consistency matches Choice, Drawing out the connections between the firm's plans for growth and the financing requirements. Drawing out the connections between the firm's plans for growth and the financing requirements.

Match the form of payment on the left with the appropriate definition.

Credit card matches Choice, A line of credit to make purchases up to a stated limit. A line of credit to make purchases up to a stated limit. Debit card matches Choice, Immediate electronic payment for a purchase. Immediate electronic payment for a purchase. Credit transfer matches Choice, A regular payment to a supplier via a standing order. A regular payment to a supplier via a standing order. Direct payment matches Choice, A direct debit. A direct debit. Charge card matches Choice, A balance that must be paid in full at the end of the month A balance that must be paid in full at the end of the month

Select all that apply The issue costs are higher for equity than for debt securities for which of the following reasons?

Extra Administrative Costs Underwriters demand extra compensation for bearing greater risk

Select all that apply Which of the following are costs imposed on the firm by customers who are slow to pay off their accounts receivable?

Increase in working capital. Increase in collection costs.

Select all that apply Percentage of sales models assume that forecasts are proportional to the forecasted level of sales, but which of the following variables contradict this assumption?

Inventory and cash balances usually rise less rapidly than sales Fixed assets are not usually added as sales increase

Which of the following statements describes a seasoned offering?

It is the sale of additional securities by a firm that is already publicly traded.

Select all that apply What are two lessons financial managers should be aware of in regard to financial leverage?

Many financing schemes hold hidden debt costs Debt is not cheap financing

Select all that apply Which of the following cannot be provided by financial planning models?

Recommendations regarding an optimal plan Whether or not the company should issue new debt or equity

Select all that apply Which of the following statements is/are correct?

Shareholders' taxes can be affected by the firm's decision to payout cash or retain it. Accumulation of cash by a mature firm can lead to problems like overinvestment and excessive perks. In a maturing company that is not paying out cash to shareholders, the stock price will begin to stagnate.

Select all that apply Some investors have preference for high dividend payout stocks. Which of the following are reasons why investors may prefer high dividend stocks?

Some investors use dividends for a steady source of cash income to live on. Some financial institutions are legally restricted from holding stocks lacking established dividend records.

Which form of government is most likely to set limitations on dividends?

State Law

Which of the following is the safest and most liquid money market instrument?

Treasury bills

True or false: Starting in 2018 with a reduced tax rate in place, U.S. corporations no longer have an incentive to leave profits abroad.

True

True or false: There are advantages to holding a reservoir of cash for smaller firms, who may face higher costs to raise funds on short notice.

True

A time draft in which the bank guarantees the customer's debt is known as a(n)

banker's acceptance

The most common method used in the U.S. to determine demand for and price of a stock in an IPO is called the ________ method.

bookbuilding

If the firm chooses a payout policy that results in less taxes paid by investors on their returns, then its stock price should ______.

increase

The announcement of a dividend increase prompts a(n) _______ in stock price and a dividend decrease prompts a(n) ________ in stock price.

increase; decrease

According to MM proposition II, as a firm adds debt to its capital structure, its debt-equity ratio ________, its return on equity _______, and its return on assets ________.

increases; increases; remains constant

According to the trade-off theory, firms often view the debt-equity decision as a trade-off between:

interest tax shields and the costs of financial distress

Select all that apply Current assets include which of the following?

inventory cash marketable securities accounts receivable

A firm that has issued debt is referred to as a ______ firm.

levered

Firms that have assets that can pass through bankruptcy with little loss of value have _______ costs of bankruptcy compared to other firms.

lower

In the U.S., underwriting of securities issues is dominated by ________.

major investment banks

A firm's value is equal to the _____ value of its debt and equity.

market

A loan made to cover a seasonal increase in inventories that is then repaid as goods are sold is referred to as a __________ loan.

self-liquidating

Since debtholders receive the fixed rate of interest on the firm's debt, all of the benefit of the interest tax shield goes to the _______.

shareholders

During financial distress, blank1 may forsake value maximization and focus on narrow self-interest. This is another cost of financial distress.

stockholders

Select all that apply Which of the following are potential consequences of financial distress?

suppliers and customers may leave employees may leave managers may pursue risky projects at the expense of the creditors

The main motivation for a firm to undertake an IPO is that _________.

they have grown to need more capital than individuals or venture capitalists can provide

Bills awaiting payment from one company to another are known as

trade credit

The best way for a firm to determine its short-term financing plan is through:

trial and error

Due to asymmetric information between managers and investors, the market will _______ the firm's share price when a new stock issue is announced.

mark down

According to MM proposition I, following a restructuring, the value of the firm:

must be the same as before

Any additional issue of stock by a company that is already publicly traded is called a __________.

seasoned offering

If a firm pays for a dividend by issuing additional shares of stock, its total firm value will be ______ and its price per share will _______.

unchanged; decrease

Optimistic managers believe their firm's shares are ________ and therefore consider external equity financing to be an expensive form of financing.

underpriced

Select all that apply Which of the following are reasons why financial planners use financial planning models?

Cheaper to construct Less labor-intensive

Select all that apply Which of the following are questions financial managers ask when determining the appropriate short-term financial plan for their firm?

Does the firm need more cash on hand or marketable securities to protect against risks such as customers stretching their payables? Does the plan yield appropriate current and quick ratios? Does the plan set the firm up for success for the following year in addition to the current year?

True or false: A firm will increase its value by increasing its dividends.

False

True or false: According to MM's propositions, there is a set amount of financial leverage that will automatically increase firm value always.

False

True or false: If a 3 month money market investment sells at a discount from face value of 5% annualized, this means that the return to the investor will be 5%.

False

Which of the following statements is consistent with the MM proposition I that capital structure does not affect the value of the firm?

Financial restructuring has no effect on firm value

Which of the following statements is true?

Repurchases have grown in popularity since 1980

Select all that apply Which of the following relates to short-term planning, but not long-term planning?

Seeks to ensure cash is available to pay bills Planning horizon of 12 months

When a firm repurchases stock by negotiating the repurchase of a block of shares from a major shareholder, this is a(n) ________.

direct negotiation

Short-term bank loans are usually made at __________.

a fixed rate of interest

When long-term financing more than covers the cumulative capital requirement, the firm has a surplus of _____ available for short-term financing

cash

Short-term unsecured notes issued by firms are known as:

commercial paper

To shareholders, an increase in the dividend payment sends a signal of managers' ________.

confidence in the future prospects of the firm

Bills awaiting payment from the customer to a company are known as

consumer credit

Inventory is a

current asset

Select all that apply Working capital consists of:

current assets current liabilities

Net working capital is equal to:

current assets minus current liabilities

Checks that have been mailed but not yet cleared are known as

float

Financial mangers use _____ to anticipate future sources and uses of cash.

forecasts

The tendency for managers to use financial slack to take it easy, expand perks or make ill-advised acquisitions is called the _________.

free cash-flow problem

The amount of external financing that a firm will require depends on the firm's projected _______.

growth

It makes more sense to for young firms to have a blank1 earnings reinvestment rate.

high

The trade-off theory of optimal capital structure predicts that firms with safe, tangible assets and plenty of taxable income will have _____ target debt ratios, while unprofitable firms with risky, intangible assets will have ______ target debt ratios.

high; low

Firms that rely on intangible or human assets have ______ costs of bankruptcy compared to other firms.

higher

Select all that apply The two rules of success in venture capital management are __________, and ___________.

identify losers early and cut your losses be willing to take a big risk, but only for a potential big reward