Fundamentals of Corporate Finance, Chapter 14 15 20

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Which of the following statements is​ FALSE?

. The major advantage of undertaking an IPO is also one of the major disadvantages of an​ IPO: When investors diversify their​ holdings, the equity holders of the corporation become more concentrated

What is the maximum maturity of commercial​ paper?

270 days

Which of the following statements regarding lines of credit is​ FALSE?

A. The line of credit agreement may also stipulate that at some point in time the outstanding balance must be zero. This policy ensures that the firm does not use the shortminus−term financing to finance its longminus−term obligations. B. The line of credit may be​ uncommitted, meaning it is an informal agreement that does not legally bind the bank to provide the funds. C. A revolving line of credit with no fixed maturity is called evergreen credit. D. A revolving line of credit is an uncommitted line of credit that involves an informal agreement from the bank for a longer period of​ time, typically two to three years. D

underwriters generally:

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

Which one of the following increases cash?

Accepting credit from a supplier

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as

Accounts receivable financing

With Dutch auction underwriting:

All successful bidders pay the same price per share

What is the term used for a shortminus−​term, unsecured debt sold by a large company to​ investors?

Commercial Paper

Money deposited by a borrower with the bank in a low or non interest bearing account as a condition of a loan agreement is called a

Compensating balance

Which of the following is a committed line of credit with no fixed​ maturity?

Evergreen credit

Commercial paper is usually a more expensive source of funds than a shortminus−term bank loan

False

In a best−efforts ​IPO, the underwriter guarantees that all stock will be sold.

False

The announcement of an SEO usually raises a​ stock's price.

False

True or False When bond yields have​ increased, by exercising the call on the callable bond and then immediately​ refinancing, the issuer can lower its borrowing costs.

False

True or false regarding a call​ provision? The call price is generally set at or​ below, and expressed as a percentage​ of, the​ bond's face value.

False

True or false? A​ firm's need for outside capital usually ends at the IPO.

False

D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?

Firm commitment

Which of the following best describes the agreement where all of a​ firm's inventory is used to secure a​ loan?

Floating lien

The difference between the underwriters cost of buying shares in a firm commitment and the offering price of those securities to the public is called the

Gross spread

With firm commitment underwriting, the issuing firm:

Knows upfront the amount of money it will receive from the stock offering

A compensating balance

May be required even if a firm never borrows funds

Why do the issuers of bonds not seek to minimize the strength and numbers of covenants in a bond agreement?

More covenants lower the interest rate investors will require to buy the bond

Why do the issuers of bonds not seek to minimize the strength and number of covenants in a bond​ agreement?

More covenants lower the interest rate investors will require to buy the bond.

Alberto currently owns 2500 shares of Southern Tools. He has just been notified that the firm is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?

Rights offer

What is a seasoned equity offering?

Sale of newly issued equity shares by a firm that is currently publicly owned

Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0

Selling inventory at a profit on credit

To purchase a share in a rights offering, an existing shareholder generally just needs to:

Submit the required number of rights along with the subscription price

In which of the following situations would the yield to worst for a certain bond be that bonds yield to call?

The bond's coupon payments are high relative to market yields; The likelihood of the bond being called is high

Which of the following statements is​ FALSE?

The process of selling stock to the public for the first time is called a seasoned equity offering​ (SEO).

Which of the following best describes a firm commitment​ IPO?

The underwriter purchases the entire issue at a small discount and then resells it at the offer price.

A short−term financial plan tracks a​ firm's cash balance and new and existing short−term ​financing, enabling managers to forecast shortfalls and plan to fund them in the least costly manner

True

The accounts receivable and inventory of a firm typically are used as collateral when issuing shortminus−term secured financing.

True

The firm commitment process is the most common practice for IPOs in the United States.

True

The interest on commercial paper is typically paid by selling it at an initial discount.

True

The main advantages for a firm in going public are greater liquidity and better access to capital.

True

Assume all else held constant. If you pay your suppliers five days sooner then

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

A petroleum exploration company takes a shortminus−term bank loan in order to finance the purchase of several truckminus−​mounted, vibroseis​ shakers, which have unexpectedly come onto the market at a good price. Once the purchase is​ made, the company will obtain longminus−term financing. Which of the following best describes the shortminus−term loan the company has​ taken?

a bridge loan

In which of the following loans can inventory NOT be used as​ collateral?

a factoring arrangement

In terms of public offerings of bonds, what is an indenture?

a formal contract that specifies a firm's obligations to the bondholders

In terms of public offerings of​ bonds, what is an​ indenture?

a formal contract that specifies a​ firm's obligations to the bondholders

Athelstone Realty issues debt with a maturity of 20 years. In the case of​ bankruptcy, holders of this debt may claim the property held by Athelstone Realty. Which of the following best describes this type of corporate​ debt?

a mortgage bond

​Nature's Bounty, an organic seed​ company, is seeking to grow from a small company selling seeds in local markets into a company that sells seeds across several states. The funding for this expansion comes from a wealthy individual who uses his considerable inherited wealth to fund a variety of ecominus−friendly businesses. Which of the following best describes the​ individual's relationship with​ Nature's Bounty?

an angel investor

Which of the following terms best describes a loan where a larger line of credit or lower interest rate has been obtained by providing collateral to back that​ loan?

an asset backed line of credit

The Ontario​ Teachers' Pension Plan is a pension fund for public school teachers in the province of Ontario. It has a large and diverse portfolio of​ investments, both in Canada and​ internationally, and had net assets in December 2007 of​ C$108.5 billion. Which of the following best describes the Ontario​ Teachers' Pension​ Plan?

an institutional investor

What is a call provision?

an option to the issuer to repurchase the bonds at a predetermined price

Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a

cash budget

Which of the following best describes the agreement where a firm sells receivables to a lender and the lender agrees to pay the firm the amount due from its customers at the end of the​ firm's payment​ period, with the provision that the lender will receive payment from the borrower if the customers default on their​ payments?

factoring of accounts receivable with recourse

When a callable bond sells at a​ premium, the likelihood of a call is​ ________ and the yield to worst is the yield to​ ________.

high, call

Which of the following is an advantage of a public bond issue over private​ placement?

it is freely tradable on the bond market

What kind of corporate dent must be secured by real property?

mortgage bonds

As part of the registration​ statement, the preliminary prospectus circulates to investors before the stock is offered. This preliminary prospectus is also called​ a(n)

red herring

What is a seasoned equity​ offering?

the issuing of shares by a company at a time after its IPO

What is a​ bond's seniority?

the​ bondholder's priority in claiming assets in the event of default

Convertible bonds have a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock.

true


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