Module 5 & 6- MBA 702 Choi

The ex-dividend date is defined as _____ business day(s) before the date of record.

2

Which one of these will increase a company's aftertax cost of debt?

A decrease in the company's tax rate.

Which of the following statements related to cash dividends is correct?

A dividend is never a liability of the issuer until it has been declared

What is a prospectus?

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

All else constant, which of the following will increase a company's cost of equity if the company computers that cost using the security market approach? Assume the firm currently pays an annual dividend of $1 per share and has a beta of 1.2

A reduction in the risk-free rate

The subjective approach to project analysis:

Assigns discount rates to projects based on the discretion of the senior managers of a firm.

A company's current cost of capital is based on

Both the returns currently required by its debtholders and stockholders.

Which of the following is the equity risk that is most related to the daily operations of a firm?

Business risk

Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the

Cost of Debt

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith Inc. What is the return that these individuals require on this investment called?

Cost of Equity

Which of the following dates is used to determine the names of shareholders who will receive a dividend payment?

Date of record

A $.45 quarterly cash payment paid by Jones & Co to its shareholder in the normal course of business becomes a liability of the company on the:

Declaration Date

Percent ownership dilution

Dilution refers to the reduction of an individual shareholder's ownership percentage in a company as a result of the issuance of new shares.

The explicit costs, such as legal and administrative expenses, associate with corporate default are classified as _______ costs

Direct Bankruptcy

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

Dividend payment to shareholders

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?

Dutch Auction

Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this?

Firm Commitment

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

General cash offer

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

Greater the sensitivity of EPS to changes in EBIT

Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following?

Green Shoe provision

A syndicate can best be defined as a:

Group of underwriters sharing the risk of selling new issue of securities

If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to

Increase the average risk level of the company over time.

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

Indirect Bankruptcy

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?

Interest tax shield

Which of these describes an exception to the registration filing requirement of the SEC?

Issues of less than $5 million

Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries declared a dividend on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information?

Kate is entitled to the dividend but Ted is not

Which of the following states that the value of a company is unrelated to the company's capital structure?

M&M Proposition 1, no tax

The fact that flotation costs can be significant is an argument for:

Maintaining a low dividend policy and rarely issuing extra dividends

Existing Shareholders:

May or may not have a pre-emptive right to newly issued shares.

Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation?

Percent ownership dilution

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

Provides better returns to issuing firms. Arguments in favor- helps prevent winners curse, rewards institutional investors who share their market value opinions, reduces potential lawsuits against underwriters, diminishes underwriting risk.

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.

Pure Play

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period.

Quiet

The cost of preferred stock is computed the same as the

Rate of return on a perpetuity

Which of the following is a preliminary prospectus?

Red herring

The Securities and Exchange Commission

Reviews registration statements to ensure they comply with current laws and regulations.

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company 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

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The firm plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this?

Shelf Registration

Which type of dividend is considered to be a one-time event that will not be repeated?

Special dividend

HJ Corporation has excess cash and has opted to buy some of its shares of outstanding common stock. What is this process of buying called?

Stock repurchase

which of the following does not affect the total equity of a company but does increase the number of shares outstanding?

Stock split

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

Supporting the market price for a new securities issue

Which of the following statements is correct in relation to M&M Proposition II, without taxes?

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

The proposition that a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt to the marginal expense of the resulting increase in financial distress costs is called

The static theory of capital structure

Bailey's decided on Friday, March 7 to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?

Thursday March 20

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called

Tombstones

Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as an

Underwriter

United Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?

Wednesday October 29

M&M Proposition 1 with tax implies that the:

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

The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the company's capital structure is called the:

Weighted average cost of capital.

Shelf Registration

a procedure that allows firms to file one registration statement for several issues of the same security

Greenshoe Provision

a provision in an IPO underwriting agreement that grants the underwriter the right to sell more shares than originally planned.

Underwriters generally

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

The dividend market is in equilibrium when

all clienteles are satisfied

With Dutch auction underwriting:

all successful bidders pay the same price per share

The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to as the _______ effect

clientele

You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level the:

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

The optimal capital structure has been achieved when the

debt-equity ratio results in the lowest possible weighted average cost of capital.

Financial risk is:

dependent upon a company's capital structure.

Dutch Auction

descending price, first bidder wins

The business risk of a company:

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

Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the company's cost of equity:

is dependent upon a reliable estimate of the market risk premium.

A stock repurchase program:

is essentially the same as a cash dividend program provided there are no taxes or other costs

A company's weighted average cost of capital______

is the return investors inquire on the total assets of the firm.

The optimal capital structure of a company

maximizes the value of that company's marketed claims

A firm should select the capital structure that

maximizes the value of the firm.

what is the information content effect?

the financial market's reaction to a change in the amount of a firm's dividend

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.

The value of the firm is maximized when the

weighted average cost of capital is minimized