FIN302 FINAL EXAM

Which one of these statements is correct? Assume all else held constant. -The cash cycle is equal to the operating cycle minus the inventory period. -A decrease in the accounts payable period shortens the cash cycle. -The cash cycle plus the accounts receivable period is equal to the operating cycle. -A decrease in the accounts receivable turnover rate decreases the cash cycle. -A negative cash cycle is preferable to a positive cash cycle.

A negative cash cycle is preferable to a positive cash cycle.

Delaney purchased 500 shares of Upriver Tours stock on Wednesday, July 7. Edward purchased 100 shares of Upriver Tours stock on Thursday, July 8. Upriver Tours declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information? -Neither Delaney nor Edward is entitled to the dividend. -Edward is entitled to the dividend but Delaney is not. -Delaney is entitled to the dividend but Edward is not. -Both Edward and Delaney are entitled to the dividend. -Both Edward and Delaney are entitled to one-half of the dividend amount.

Both Edward and Delaney are entitled to the dividend.

The board of directors of Poole met this afternoon and passed a resolution to pay a cash dividend of $.96 per share next month. In relation to this dividend, today is referred to as which one of the following dates? -Decision date -Date of record -Declaration date -Payment date -Ex-dividend date

Declaration date

Alpha Company and Beta, Incorporated, each agree to invest $10 million to form Gamma Corporation. Gamma will develop computer simulations that will be used to evaluate the products produced by both Alpha and Beta. Which one of the following terms describes Gamma Corporation? -Subsidiary -Conglomerate -Leveraged buyout -Going-private transaction -Joint venture

Joint venture

According to ________, the value of a company is unrelated to its capital structure. -M&M Proposition I, no tax -the pecking-order theory -the static theory of capital structure -the homemade leverage principle -M&M Proposition II, no tax

M&M Proposition I, no tax

According to ________, the cost of equity capital is directly and proportionally related to capital structure. -the static theory of capital structure -the pecking-order theory -the homemade leverage principle -M&M Proposition I -M&M Proposition II

M&M Proposition II

Keondre was interested in taking control of Sosa Sport. During his research he discovered that Sosa's existing shareholders had the right to purchase additional shares at below-market prices in the event of a hostile takeover attempt. Accordingly, Keondre decided not to invest in the firm. What term applies to the tactic used by Sosa Sport to prevent this takeover attempt? -"Pac-man" defense -Bear hug -Golden parachute provision -Greenmail provision -Share rights plan

Share rights plan

Plummer Manufacturing recently registered 220,000 shares of stock under SEC Rule 415. The company plans to sell 120,000 shares this year and the remaining 100,000 shares next year. What type of registration is this? -Standby registration -Shelf registration -Regulation A registration -Regulation Q registration _Private placement registration

Shelf registration

The present value of the interest tax shield is expressed as: -TCD. -VU + TCD. -TCDRA. -TCD/RA. -[EBIT(TCD)]/RA.

TCD.

Which one of the following statements correctly applies to a legally defined merger? -The acquiring firm retained its identity and absorbs only the assets of the acquired firm -The acquired firm is completely absorbed and ceases to exists as a separate legal entity -A new firm is created that includes all the assets and liabilities if the acquiring firm plus the assets only of the acquired firm -A new firm is created from the assets and liabilities of both the acquiring and acquired firms -A merger reclassifies the acquired firm into a new entity that becomes a subsidiary of the acquiring firm

The acquired firm is completely absorbed and ceases to exists as a separate legal entity

According to M&M Proposition II, without taxes, which of the following statements is accurate? -The cost of equity remains constant as the debt-equity ratio increases. -The required return on assets is equal to the weighted average cost of capital. -The cost of equity is inversely related to the debt-equity ratio. -Financial risk is unaffected by the debt-equity ratio. -Financial risk determines the return on assets.

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

Hasan Electric declared a dividend of $.48 per share on Monday, October 18. The dividend will be paid on Monday, November 15, to shareholders of record on Friday, October 29. Which one of the following is the ex-dividend date? -Thursday, November 11 -Wednesday, November 10 -Tuesday, October 26 -Wednesday, October 27 -Thursday, October 28

Thursday, October 28

When selecting a venture capitalist, which one of the following characteristics is probably the least important? -Financial strength -Level of involvement -Contacts -Exit strategy -Underwriting experience

Underwriting experience

A personal computer company announced today that it had acquired a hard drive manufacturer. Which type of an acquisition was this? -Horizontal -Conglomerate -Vertical -Longitudinal -Indirect

Vertical

A 1-for-4 reverse stock split will increase: -the par value by 25 percent. -the market value but not affect the par value per share. -the number of shares outstanding by 400 percent. -a $1 par value to $4. -a $1 par value to $5.

a $1 par value to $4.

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

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

The length of time between the sale of inventory and the collection of the payment for that sale is called the: -cash cycle. -operating cycle. -inventory period. -accounts receivable period. -accounts payable period.

accounts receivable period.

All else held constant, the cash cycle will decrease when the: -accounts receivable turnover rate increases. -accounts payable period decreases. -inventory period increases. -inventory turnover rate decreases. -accounts receivable period increases.

accounts receivable turnover rate increases.

The operating cycle will decrease when the: -accounts receivable period increases. -accounts receivable turnover rate increases. -accounts payable period increases. -accounts payable period decreases. -inventory turnover rate decreases.

accounts receivable turnover rate increases.

In a tax-free acquisition, the shareholders of the target firm: -receive income that is considered to be tax-exempt. -gift their shares to a tax-exempt organization and therefore have no taxable gain. -are viewed as having exchanged shares on a dollar-for-dollar basis. -sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes. -sell their shares at cost thereby avoiding the capital gains tax.

are viewed as having exchanged shares on a dollar-for-dollar basis.

With a compromise financial policy companies will: -borrow only long-term funds and refuse any loans that require compensating balances. -borrow short-term funds and also invest in marketable securities. -finance all of their assets with various short-term loans. -finance their seasonal asset peaks with short-term debt and the remainder of their assets with equity. -finance half of their fixed assets with long-term debt and half with short-term debt.

borrow short-term funds and also invest in marketable securities.

According to pecking-order theory: -there is a direct relationship between a company's profits and its debt levels. -companies avoid external debt except as a last resort. -companies stockpile internally generated cash. -every company has an optimal capital structure. -a company's capital structure is independent of its need for external funding.

companies stockpile internally generated cash.

Ignoring taxes, at the break-even point between a levered and an unlevered capital structure, the: -company is earning just enough to pay for the cost of the debt. -company has a debt-equity ratio of .50. -earnings per share for the levered option are exactly double those of the unlevered option. -advantages of leverage exceed the disadvantages of leverage. -company's earnings before interest and taxes are equal to zero.

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

A potential merger that produces synergy: -creates value and therefore should be pursued. -reduces the anticipated net income from the target firm. -should be rejected due to the projected negative cash flows. -should be rejected because the synergy will dilute the benefits of the merger. -has a net present value of zero.

creates value and therefore should be pursued.

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to: -increase -decrease -remain constant -respond, but the direction of the response is not predictable as shown by past studies -decrease momentarily and then immediately increase substantially within an hour following the announcement

decrease

In the past, Forge Tool & Die produced products and placed them in inventory until they were ordered by a customer. Presently, the company produces a product only when an order is received from a customer. All else equal, this change will: -decrease the cash cycle. -increase the operating cycle. -lengthen the accounts receivable period. -shorten the accounts payable period. -decrease the inventory turnover rate.

decrease the cash cycle.

Based on M&M Proposition I with taxes, the weighted average cost of capital: -is equal to the aftertax cost of debt -has a linear relationship with the cost of equity capital -is unaffected by the tax rate -decreases as the debt-equity ratio increases -is equal to Ru(1-Tc)

decreases as the debt-equity ratio increases

DeLeon Networks has decided to sell its production operations in order to focus solely on its consulting activities. The sale is referred to as a(n): -liquidation -divestiture -merger -allocation -restructuring

divestiture

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: -higher the tax rate. -lower the impact of financial leverage. -lower the debt-equity ratio. -greater the sensitivity of EPS to changes in EBIT. -lower the probability of a negative EPS.

greater the sensitivity of EPS to changes in EBIT.

The existence of _____ makes the capital stricture of a company irrelevant. -taxes -the interest tax shield -100 percent dividend payout ratio a debt-equity ratio that is greater than 0 but less than 1 -homemade leverage

homemade leverage

All of the following are examples of cost reductions that can result from an acquisition except: -reducing the number of management personnel required. -benefiting from economies of scale when purchasing raw materials. -allocating fixed overhead across a wider range of products. -lowering office costs by combining job functions. -increasing the firm's market share.

increasing the firm's market share.

A proposed acquisition is most apt to create synergy by: -decreasing the market power of the combined firm. -disbanding the distribution network of the combined firm. -eliminating any strategic advantages of the target firm. -increasing the utilization of the acquiring firm's assets. -increasing the overhead costs.

increasing the utilization of the acquiring firm's assets.

According to the pecking-order theory, firms prefer to use ____ before any other form of financing. -regular debt -convertible debt -common stock -preferred stock -internal funds

internal funds

A firm with a flexible short-term financial policy will: -maintain a low balance in accounts receivables. -only have minimal amounts, if any, invested in marketable securities. -invest heavily in inventory. -have low cash balances. -have tight restrictions on granting credit to customers.

invest heavily in inventory.

Homemade leverage is employed when a(n) ________: -investor uses debt to change his or her exposure to financial leverage. -corporation uses debt to pay dividends to shareholders. -corporation uses debt exclusively to fund a corporate expansion project. -firm employs any amount of debt in its capital. -firm increases its level of debt.

investor uses debt to change his or her exposure to financial leverage.

The business risk of a company: -depends on the company's level of unsystematic risk -is inversely related to the required return on the company's assets -is dependent upon the relative weights of the debt and equity used to finance the company -is positively related to the company's cost of equity -has no relationship with the required return on a company's assets according to M&M theory

is positively related to the company's cost of equity

Tope and several of his friends collectively borrowed enough money to acquire all of the outstanding shares of Coburn & Collins Corporation. This transaction is known as a(n): -proxy contest. -management buyout. -vertical acquisition. -leveraged buyout. -unfriendly takeover.

leveraged buyout.

If a company adheres to a restrictive short-term financial policy, then they will generally have: -liberal credit terms for customers. -few, if any, stockouts. -high cash balances. -little, if any, investment in marketable securities. -low inventory turnover rates.

little, if any, investment in marketable securities.

A company that has a(n) _____ would be most likely to have a high percentage of debt in its optimal capital structure. -exceptionally high level of depreciation expense -very low marginal tax rate -substantial level of tax shields from other sources -low profitability of financial distress -minimal level of taxable income

low profitability of financial distress

The information content of a dividend increase generally signals that: -the payer has a one-time surplus of cash -the payer had few, if any, net present value projects to pursue -management believes earnings growth will be strong going forward -the payer has more cash than it needs due to a decline in future orders -dividends thereafter will be lower

management believes earnings growth will be strong going forward

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

maximizes the value of the firm.

Ehlinger Investments announced today that it has acquired all of the assets and liabilities of Thompson Equity. The combined firm will be known as Ehlinger Investments; Thompson Equity no longer exists as a separate entity. This acquisition is best described as a: -tender offer. -divestiture. -consolidation. -spinoff. -merger.

merger

For financial statement purposes, goodwill created by an acquisition: -must be amortized on a straight-line basis over 10 years. -must be reviewed each year and amortized to the extent that it has lost value. -is expensed evenly over a 20-year period. -never affects the profits of the acquiring firm. -is recorded in an amount equal to the fair market value of the assets of the target firm.

must be reviewed each year and amortized to the extent that it has lost value.

All else held constant, the operating cycle will increase when the: -payables period decreases. -receivables turnover rate decreases. -payables period increases. -average inventory level decreases. -inventory turnover rate increases.

receivables turnover rate decreases.

The Securities and Exchange Commission: -verifies the accuracy of the information contained in the prospectus -publishes red herrings on prospective new security offerings -examines the prospectus during the Green Shoe period -reviews registration statements to ensure they comply with current laws and regulations -determines the final offer price they have approved the registration statement

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

If a firm sells its crown jewels when threatened with a takeover attempt, the firm is employing a strategy commonly referred to as a _____ strategy. -scorched earth -white knight -lockup -shark repellent -bear hug

scorched earth

Horbath Brands is the sole shareholder of its subsidiary, Shoe Time. Horbath has decided to divest itself of its footwear business and does so by distributing the shares in the subsidiary to the shareholders of Horbath Brands. This distribution of shares is called a(n): -split-up. -spin-off. -equity carve-out. -bear hug. -lockup transaction.

spin-off

Ojomo Corporation recently acquired Fin, Incorporated. Ojomo determined that the transaction had a net present value of $2.2 million. This $2.2 million is called: -the agency effect. -the consolidating value. -the diversification benefit. -the consolidation effect. -synergy.

synergy.

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

the net cost of debt is generally less than the cost of equity.

M&M Proposition I with taxes is based on the concept that: -WACC is unaffected by a change in the company's capital structure. -capital structure is irrelevant because investors and companies have differing tax rates. -the value of a taxable company increases as the level of debt increases. -the cost of equity increases as the debt-equity ratio increases. -the optimal capital structure is the one that is totally financed with equity.

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

The last date on which you can purchase shares of stock and still receive the next dividend is the date that is _____ business day(s) prior to the date of record. -four -one -three -five -two

two

If a company has the optimal amount of debt, then the: -debt-equity ratio is equal to 1. -direct financial distress costs must equal the present value of the interest tax shield. -value of the levered company will exceed the value of the unlevered company. -company has no financial distress costs. -value of the firm is equal to VL + TCD.

value of the levered company will exceed the value of the unlevered company.

M&M Proposition I with tax implies that the: -value of a company is inversely related to the amount of leverage used by that company. -weighted average cost of capital decreases as the debt-equity ratio increases. -value of an unlevered company equals the value of a levered company plus the value of the interest tax shield. -cost of equity increases as the debt-equity ratio decreases. -cost of capital is the same regardless of the mix of debt and equity used

weighted average cost of capital decreases as the debt-equity ratio increases.

The value of a firm is maximized when the: -levered cost of capital is maximized. -tax rate equals the cost of capital. -weighted average cost of capital is minimized. -debt-equity ratio is minimized. -cost of equity is maximized.

weighted average cost of capital is minimized.

Angilau Consulting is acquiring all of the assets of Majors, Incorporated. As a result, Majors: -will become a fully owned subsidiary of Angilau Consulting. -will remain as a shell corporation unless the shareholders opt to dissolve it. -will be fully merged into Angilau Consulting and will no longer exist as a separate entity. -and Angilau Consulting will both cease to exist and a new firm will be formed. -will automatically be dissolved.

will remain as a shell corporation unless the shareholders opt to dissolve it.

Assume all else held constant. If you pay your suppliers three days sooner, then: -the accounts receivable period will decrease. -the cash cycle will decrease. -you may require additional funds from other sources to fund the cash cycle. -your operating cycle will decrease. -your payables turnover rate will decrease.

you may require additional funds from other sources to fund the cash cycle.