FIN3414 Exam 3

Retailers; Automotive

(blank) and (blank) firms fluctuate with the business cycle

Transportation; utilities

(blank) firms and (blank) are less dependent upon the business cycle

Milking the Property

(ex.) paying out extra dividends or other distributions in times of financial distress, leaving less in the firm for the bondholders

In a 12 month period, a company is permitted to raise a max of what through crowd funding?

1 million

What is the WACC formula for a firm with no debt or preferred stock?

1 x Cost of Equity

If the firm issued so much debt that its equity was valueless, its average cost of capital would equal?

1 x the after tax cost of debt

Factors that Encourage High Dividend Payout

1) desire for current income 2) conforming to behavioral finance 3) the need to reduce agency costs 4) dividend signaling

A. Three Selfish Behaviors of Stockholders

1) taking risks 2) underinvestment 3) milking the property

How long is the waiting period once a registration statement is filed with the SEC for a new issue?

20 days

A relatively new, unprofitable firm that is currently selling its product but needs additional working capital will seek which stage of Venture Capital financing?

2nd round financing

Venture Capitalists will often require what?

40% or more of firm's equity several seats on the company's BOD

Internal; external; external

According to pecking order theory, (blank) equity is better to issue than (blank) equity due to the negative signaling implications (blank) financing brings.

Undervalued

According to pecking order theory, if managers believe the stock is (blank), they will issue bonds that have little to no risk of default.

Overvalued

According to pecking order theory, managers only will issue new stock if the stock is (blank).

A individual or group or individuals, that fund a new start-up company are referred to as what?

Angel Investors

What do we know about the stability of a firm's Beta?

Beta changes over time Beta are more likely to be stable if firm in same industry

Declaration Date

Board of Directors declares a payment of dividends

Firms with high standard deviations?

Can sometimes have HIGH betas Can something have LOW betas

A point plotted SML represents a project being considered by an all-equity firm, the project's IRR must be greater than the cost of ?

Capital and Equity

What are general characteristics of Venture Capitalists

Desire of an exit strategy Frequent involvement In BOD of firms receiving funding Function as a Financial Intermediary

With the ___ method of issuing securities, the underwriter determines the offer price based on the submitted bids

Dutch auction underwriting

A firm should only undertake a project if its expected return is ____ that of a financial asset of comparable risk.

Equal to or greater than

The payment to lawyers become relent in the context of Capital structure decisions in the event of ?

Financial Distress

High; low

Firms with (blank) fixed costs and (blank) variable costs are said to have high operating leverage

Low; high

Firms with (blank) fixed costs and (blank) variable costs are said to have low operating leverage

Why do bond covenants restrict high-risk investments by shareholders during financial distress?

High risk projects tend to transfer wealth from the bondholders to the shareholders

Well; poorly

Highly cyclical firms do (blank) in the expansion phase of the business cycle and do (blank) in the contraction phase.

Higher

Highly cyclical stocks have (blank) betas

Brokers who sell stock on MARGIN will protect themselves by?

Holding the stock as collateral Requiring additional cash contributions from the investor Selling stock to satisfy the loan

Same; same

If WACC is used as the hurdle rate, the project risk must be the (blank) as the firm's and the project must also use the (blank) mix of debt and equity as the firm does

Firm's Beta

If you believe that the operations of the firm are fundamentally different from the operations of the rest of the industry, you should use the

Industry Beta

If you believe that the operations of the firm are similar to the operations of the rest of the industry, you could use the

Total Debt (Rb)

In the WACC equation, the term that best captures financial distress would be (blank) because the only way to incur costs of financial distress is too have issued too much debt.

What is true about WACC?

It is the expected return a firm must earn on its existing assets to maintain its current value It is also referred to as the Discount Rate that is used to discount cash flows in capital budgeting problems

What can change Beta over time?

Leverage Product line Technology

Higher

Levered firms have a (blank) beta than unlevered firms

The sales of cyclical firms are ____ sensitive to the business cycle than are the sales of non-cyclical firms.

MORE

A firms cost of debt can be

Obtained by checking yields on publicly traded bonds Estimated easier than its cost of equity Obtained by talking to investment bankers

When is a new issue usually Priced?

On the last day of registration period

Under the MM propositions with no taxes, managers cannot change the value of the firm by repackaging its securities because ____?

Overall cost of capital cant be reduced As debt is added, equity becomes more risky

Preferred stock does?

Pays constant dividend Pays dividends in perpetuity

What are the advantages of using Internal financing?

Prevents the adverse market reaction that tends to accompany a stock issue It may be cheaper than debt or equity issues

The period of time before and after an IPO when communication with the public is limited is known as what?

Quiet Time

The preliminary prospectus, which contains much of the information found in the registration statement and is distributed to potential investors is called what?

Red Herring

According the CAPM, what is the expected return on a stock if its beta is equal to 0?

Risk free rate

What stage of VC financing is generally used to pay for marketing and product development expenditures?

Start Up

The WACC is the minimum return a company needs to earn to satisfy who?

Stockholder and Bondholders

The most difficult part of underwriting process for an IPO is determining the correct offer price T or F

TRUE

Under US tax law, a corporation's interest payments are tax deductible. T or F

TRUE

The available evidence indicated that there are pronounced cycles in what?

The # of IPOS The degree of IPO underpricing

What activities occur in the aftermarket period?

The Green Shoe provision may be exercised Underwriter may need to step in and purchase shares to establish a price floor

A corporation gains no value from an interest tax shield if what is true?

The corporation is an all equity firm The corporation has no debt Corporate tax rates are 0

What two things do you need to compute the beta for a company's stock?

The covariance btw the stock and the market index's returns The variance of the market index's returns

Fall

The stock price of a firm will generally (blank) when the firm announces a decrease in the dividend.

Rise

The stock price of a firm will generally (blank) when the firm announces an increase in the dividend.

What is true about US Treasury instruments?

They have never defaulted They are not expected to default at this time

An advertisement used after the registration-waiting period to announce a new securities issue is called?

Tombstone

Debt; financial distress

Trade off theory implies that a firm's capital structure decisions involve a trade-off between the tax benefits of (blank) and the costs of (blank); believes there is an optimal level of debt

A Dutch auction underwriting is also known as ?

Uniform price auction

Financing from wealthy individuals or private investment groups is referred to as?

Venture Capital

Increase

When debt levels increase or as the debt-equity ratio increases, Rs (the cost of equity) will (blank).

Less

a levered firm pays (blank) in taxes than an unlevered firm

M&M Proposition I (wo/taxes)

argues that a firm cannot change the total value of its outstanding securities by changing the proportions of its capital structure; meaning no capital structure is any better or worse than any other capital structure for the firm's stockholders. To summarize the value of the levered firm is the same as the value of the unlevered firm

MM Proposition II (wo/taxes)

argues that expected return on equity is positively related to leverage because since levered equity has greater risk, it should have a greater expected return as compensation

Cum-Dividend Date

buyer of stock still receives the dividend

Operating Leverage

degree which measures how sensitive a firm is to its fixed costs

Taking Risks

gambling with large amounts of money when the firm is nearing bankruptcy, because the firm believes they are betting other people's money

Higher Beta

higher operating leverage means:

Free Cash Flow

is the amount of cash the firm can pay out to investors after making all necessary investments for growth; better measure of value creation than dividend model

An agreement in an underwriting contract that prohibits insider shares from being sold immediately following an IPO is called what?

lock out period

Beta

measures the sensitivity of a stock's return to the return on the market portfolio

Operating Leverage

refers to the sensitivity to the firm's fixed costs of production

R(WACC)

reflects the risk and the capital structure of the firm's existing assets

Ex-Dividend Date

seller of the stock retains the dividend

M&M Proposition II (w/taxes)

some of the increase in equity risk and return is offset by the interest tax shield

Pecking Order Theory

states that firms prefer to issue debt rather than equity if internal finance is insignificant

Underinvestment

stockholders often find that a firm nearing bankruptcy, which continues to invest, will only help the bondholders at the stockholders' expense. Even if this additional investment can produce a positive NPV, the project will still not be taken unless it can prevent bankruptcy

Record Date

the corporation prepares a list of all individuals believed to be stockholders as of a certain date

M&M Proposition I (w/taxes)

the firm's value will increase with leverage

Financial Leverage

the sensitivity to a firm's fixed costs of financing; the extent to which a firm relies on debt

WACC

weighs the cost of equity and the cost of debt then averages them out