Fin mngt exam 1

Which one of these statements related to Chapter 11 bankruptcy is accurate?

Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage.

Which one of the following statements is correct concerning the issuance of long-term debt?

Direct placement debt tends to have more restrictive covenants than publicly issued debt

Which one of the following is a marketed claim against the cash flows of a company?

Dividend payment to shareholders

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

General cash offer

The concept of homemade leverage is most associated with:

M&M Proposition 1 with no tax

According to ________, the value of a company is unrelated to its capital structure.

M&M Proposition I, no tax

According to ________, the cost of equity capital is directly and proportionally related to capital structure.

M&M Proposition II

What is a seasoned equity offering?

Sale of newly issued equity shares by a publicly owned company

Carew-Gonzales Corporation's net working capital and all of its expenses vary directly with sales. The firm is currently operating at 92 percent of capacity. The firm wants no additional external financing of any kind. The firm's income tax rate is 21 percent and its dividend payout ratio is fixed at 22 percent. Which statement related to next year's pro forma statements must be correct?

The firm cannot exceed its internal rate of growth

The sustainable growth rate of a firm is best described as the ______ growth rate achievable ______.

The sustainable growth rate of a firm is best described as the ______ growth rate achievable ______.

Which one of the following statements related to Chapter 7 bankruptcy is correct?

Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated.

What is a prospectus?

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

With Dutch auction underwriting:

all successful bidders pay the same price per share

The symbol "RU" refers to the cost of capital for a(n) ______ while "RA" represents the:

all-equity company: weighted average cost of capital

The financial planning process is least apt to:

consider the development of future technologies.

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

decrease

All else constant, a(n) ______ will increase the internal rate of growth.

decrease in total assts

When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance?

dividend policy

According to the static theory of capital structure, the optimal capital structure for a company:

equates marginal tax savings from additional debt to the marginal increased bankruptcy costs that debt.

According to the pecking-order theory, firms prefer to use ________ before any other form of financing.

internal funds

A company is technically insolvent when:

it is unable to meet its financial obligations.

A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:

long-term debt

A company that has a(n) ________ would be most likely to have a high percentage of debt in its optimal capital structure.

low probability of financial distress

The financial planning process tends to place the least emphasis on a firm's:

market value

The optimal capital structure of a company:

maximizes the value of that company's marketed claims

Garden Gate recently had a rights offering of 27,000 shares at an offer price of $14.20 per share. Rachel is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owned. Currently, there are six shareholders who have opted not to participate in the rights offering. Rachel would like to purchase these unsubscribed shares. Which one of the following will allow her to do so?

oversubscription privilege

Mascorro Insurance recently provided a loan of $12.5 million to Grisham Furnishings. The loan is for 20 years at 7.2 percent interest. This loan is best described as a:

private placement

All of the following are supporting arguments in favor of IPO underpricing except which one?

provides better returns to issuing firms

A preliminary prospectus is sometimes called a:

red herring

Fatou currently owns 2,500 shares of Mariner, Incorporated. She has just been offered the opportunity to purchase additional shares in the company, prior to the shares being offered to the general public. What is this type of an offer called?

rights offer

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a(n) _____ underwriting.

standby

The interest tax shield is a key reason why:

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

A firm is currently operating at 78 percent of capacity. Next year's pro forma statement is based on an annual increase in sales of 5 percent. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, the:

total assets will increase by less than 5 percent

If a company has the optimal amount of debt, then the:

value of the levered company will exceed the value of the unleveled company

Ruether Management recently offered 30,000 newly issued shares of stock to the public. The underwriters paid Ruether the uniform auction price for each of those shares, less a fee of 8.4 percent. Which one of the following terms best describes this type of underwriting?

Dutch Auction

Shares of Hetsko have been selling with rights attached. Starting tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?

Ex-rights date

Hondros Corporation recently went public. The firm offered 42,000 shares and received net proceeds of $18.56 per share. Hirani & Tran served as the underwriter and sold 37,000 shares to the public at an offer price of $20.63 per share. What type of underwriting was this?

Firm commitment

Cervantes recently offered 60,000 new shares of stock for sale. The underwriters sold a total of 73,400 shares to the public at a price of $18.20 per share. The additional 13,400 shares were purchased in accordance with which one of the following?

Green Shoe provision

Which one of the following is a key goal of the aftermarket period?

Supporting the market price of a new securities issue

The present value of the interest tax shield is expressed as:

TcD

Which one of the following is correct in relation to pro forma statements?

The addition to retained earnings is equal to net income less cash dividends

Which one of the following must be true if the sustainable growth rate will be greater than the internal growth rate?

Total debt > $0

Which ratio identifies the amount of total assets a firm needs in order to generate $1 in sales?

capital intensity ratio

Mackenzie is the CEO of Donihoo Corporation, a privately held corporation. If she wants to take Donihoo public, what must be her first step?

gain board approval

Assume you are reviewing a graph that plots earnings per share (EPS) on the vertical axis, against earnings before interest and taxes (EBIT) on the horizontal axis. The steeper the slope of the plotted line the:

greater the sensitivity of EPS to changes in EBIT

A syndicate can best be defined as a:

group of underwriters sharing the risk of selling a new issue of securities.

The business risk of a company:

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

The date on which a shareholder is officially listed as the recipient of stock rights is called the:

holder-of-record date

The existence of ________ makes the capital structure of a company irrelevant.

homemade leverage

According to ________, a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs.

the static theory of capital structure

The basic lesson of M&M theory is that the value of a company is dependent upon:

the total cash flows of that company

M&M Proposition I with taxes is based on the concept that:

the value of a taxable company increases as the level of debt increases.

A ________ is an advertisement in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering.

tombstone