Corporate FIN Final Exam (Ch26, E1, E2)

(Exam 2) Which one of the following will decrease the value of an American call option? A. A decrease in the value of the underlying security. B. An increase in the risk-free rate. C. A decrease in the exercise price. D. An increase in the price volatility of the underlying asset. E. An increase in the time to expiration.

A. A decrease in the value of the underlying security.

(Exam 1) The book value of a firm is: A. Based on historical cost. B. Equivalent to the firm's market value provided that the firm has some fixed assets. C. Generally greater than the market value when fixed assets are included. D. More of a financial than an accounting valuation. E. Adjusted to the market value whenever the market value exceeds the stated book value.

A. Based on historical cost.

(Exam 1) Incorporating flotation costs into the analysis of a project will: A. Increase the initial cash outflow of the project. B. Increase the net present value of the project. C. Increase the project's rate of return. D. Have no effect on the present value of the project. E. Cause the project to be improperly evaluated.

A. Increase the initial cash outflow of the project.

(Exam 2) A lockbox system: A. Is designed to deposit a customer's check into the firm's bank account prior to recording the receipt that check to a customer's account. B. Entails the use of a bank that is centrally located to collect payments on a nationwide basis. C. Is used to reduce the disbursement float of a firm. D. Is efficient regardless of the locations selected for lockbox destinations. E. Automatically records payments to a customer's account when the customer's check is received at the lockbox location.

A. Is designed to deposit a customer's check into the firm's bank account prior to recording the receipt that check to a customer's account.

(Exam 2) A stock repurchase program: A. Is essentially the same as a cash dividend program provided there are no taxes or other costs. B. Is preferred over a high-dividend program only by tax-exempt shareholders. C. Decreases both the number of shares outstanding and the market price per share. D. Has no effect on a firm's financial statements. E. Requires all shareholders to sell a fraction of their shares.

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

(CH26) Last month, Keyser Design acquired all of the assets and liabilities ofTenor Machine Works. The combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a separate entity. This acquisition is best described as a: A. Merger. B. Consolidation. C. Tender offer. D. Spinoff. E. Divestiture.

A. Merger.

(CH26) 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. A. Scorched earth B. Shark repellent C. Bear hug D. White knight E. Lockup

A. Scorched earth

(Exam 2) Which one of the following describes the intrinsic value of a call option? A. The call's lower bound value. B. The strike price. C. The call's upper bound value. D. Zero, if the call is in-the-money. E. Market price of the underlying security.

A. The call's lower bound value.

(Exam 2) Which one of the following statements related to Chapter 7 bankruptcy is correct? A. Under a Chapter 7 bankruptcy, a trustee will assume control of the firm's assets until those assets can be liquidated. B. A firm in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern. C. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy. D. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock are generally issued prior to the firm coming out of bankruptcy. E. Chapter 7 bankruptcies are always involuntary on the part of the firm.

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

(Exam 2) Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as: A. Pledged financing. B. Accounts receivable financing. C. Capital funding. D. Daily funding. E. Capital financing.

B. Accounts receivable financing.

(CH26) In a merger the: A. Legal status of both the acquiring firm and the target firm is terminated. B. Acquiring firm retains its pre-merger legal status. C. Acquiring firm acquires the assets, but not the liabilities, of the target firm. D. Shareholders of the target firm have little, if any, say as to whether or not the merger occurs. E. Target firm continues to exist but will be a wholly owned subsidiary of the acquiring firm.

B. Acquiring firm retains its pre-merger legal status.

(CH26) The Cat Box acquired The Dog House. As part of this transaction, both firms ceased to exist in their prior form and combined to create an all-new entity, Animal World. Which one of the following terms best describes this transaction? A. Divestiture B. Consolidation C. Tender offer D. Spin off E. Conglomeration

B. Consolidation

(CH26) Global Distributors has decided to sell its manufacturing operations and concentrate solely on its global distribution operations. This sale is referred to as a(n): A. Liquidation. B. Divestiture. C. Merger. D. Allocation. E. Restructuring.

B. Divestiture.

(CH26) Nationwide Markets is a diversified company with many divisions. It is also the sole shareholder of a wholly owned subsidiary. Management has decided to implement an IPO offering for 25 percent of the ownership of the subsidiary. Which one of these terms applies to this offering? A. Split-up B. Equity carve-out C. Tender offer D. White knight transaction E. Lockup transaction

B. Equity carve-out

(Exam 2) The investment timing decision is the: A. Determination of when an option should be exercised. B. Evaluation of the optimal time to begin a project. C. Decision of when to purchase an option on an underlying asset. D. Decision of when a project should be abandoned. E. Analysis of determining when an asset should be sold.

B. Evaluation of the optimal time to begin a project.

(Exam 1) On the statement of cash flows, which of the following are considered operating activities? I. Costs of goods sold. II. Decrease in accounts payable. III. Purchase of equipment. IV. Dividends paid. A. I and III only. B. I and II only. C. III and IV only. D. I, III, and IV only. E. I, II, III, and IV.

B. I and II only.

(CH26) Which one of the following statements correctly applies to a legally defined merger? A. The acquiring firm retains its identity and absorbs only the assets of the acquired firm. B. The acquired firm is completely absorbed and ceases to exist as a separate legal entity. C. A new firm is created that includes all the assets and liabilities of the acquiring firm plus the assets only of the acquired firm. D. A new firm is created from the assets and liabilities of both the acquiring and acquired firms. E. A merger reclassifies the acquired firm into a new entity that becomes a subsidiary of the acquiring firm.

B. The acquired firm is completely absorbed and ceases to exist as a separate legal entity.

(Exam 1) A positive cash flow to stockholders indicates which one of the following with certainty? A. The amount of the sale of common stock exceeded the amount of dividends paid. B. The dividends paid exceeded the net new equity raised. C. No dividends were distributed, but new shares of stock were sold. D. Both the cash flow to assets and the cash flow to creditors must be negative. E. Both the cash flow to assets and the cash flow to creditors must be positive.

B. The dividends paid exceeded the net new equity raised.

(CH26) Which one of the following statements correctly applies to a merger? A. The acquiring firm does not have to seek approval for the merger from its shareholders. B. The shareholders of the target firm must approve the merger. C. The acquiring firm will acquire the assets but not the debt of the target firm. D. The merged firm will have a new company name. E. The titles to individual assets of the target firm must be transferred into the acquiring firm 's name.

B. The shareholders of the target firm must approve the merger.

(Exam 2) M&M Proposition I with taxes is based on the concept that: A. The optimal capital structure is the one that is totally financed with equity. B. The value of a firm increases as the firm's debt increases because of the interest tax shield. C. A firm's W ACC is unaffected by a change in the firm's capital structure. D. The cost of equity increases as the debt-equity ratio of a firm increases. E. The capital structure of a firm does not matter because investors can use homemade leverage.

B. The value of a firm increases as the firm's debt increases because of the interest tax shield.

(Exam 2) Which one of the following statements concerning warrants is correct? A. Warrants are similar to put options. B. When a warrant is exercised, the number of outstanding shares increases. C. Warrants generally have very short maturity periods. D. Owning a warrant is the same as selling a call option. E. Shares are transferred from one shareholder to another when a warrant is exercised.

B. When a warrant is exercised, the number of outstanding shares increases.

(CH26) Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green Roof Inns: A. Will become a fully owned subsidiary of Biltwell Hotels. B. Will remain as a shell corporation unless the shareholders opt to dissolve it. C. Will be fully merged into Biltwell Hotels and will no longer exist as a separate entity. D. And Biltwell Hotels will both cease to exist and a new firm will be formed. E. Will automatically be dissolved.

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

(Exam 1) An increase in which one of the following will increase a firm 's quick ratio without affecting its cash ratio? A. Cash. B. Accounts payable. C. Accounts receivable. D. Inventory. E. Fixed assets.

C. Accounts receivable.

(CH26) In a tax-free acquisition, the shareholders of the target firm: A. Receive income that is considered to be tax-exempt. B. Gift their shares to a tax-exempt organization and therefore have no taxable gain. C. Are viewed as having exchanged shares on a dollar-for-dollar basis. D. Sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes. E. Sell their shares at cost thereby avoiding the capital gains tax.

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

(CH26) If General Electric, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition would be classified as a ________ acquisition. A. Horizontal B. Longitudinal C. Conglomerate D. Vertical E. Integrated

C. Conglomerate

(Exam 1) Which one of the following will increase the cash flow from assets, all else equal? A. Decrease in cash flow to stockholders. B. Decrease in operating cash flow. C. Decrease in the change in net working capital. D. Decrease in cash flow to creditors. E. Increase in net capital spending.

C. Decrease in the change in net working capital.

(Exam 2) Suzie is the controller of The Price Rite Company. She has been granted the right to buy 1,000 hares of her employer's stock at $25 a share anytime within the next three years. Which one of the following has Suzie been granted? A. Company bonus option B. Employee grant C. Employee stock option D. Employee exercise option E. Company benefits option

C. Employee stock option

(CH26) A group of individual investors is in the process of acquiring all of the publicly traded shares of OM Outfitters. Once the shares are acquired, they will no longer be publicly traded. Which of the following terms applies to this process? A. Tender offer B. Proxy contest C. Going-private transaction D. Leveraged buyout E. Consolidation

C. Going-private transaction

(CH26) Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite unhappy with the direction the firm is headed and is rumored to be considering an attempt to take over the firm by soliciting the votes of other shareholders. To head off this potential attempt, the board of RB Industrial Supply has decided to offer Roger $35 a share for all the shares he owns in the firm. The current market value per share is $32. This offer to purchase Roger's shares is commonly referred to as: A. A golden parachute. B. Standstill payments. C. Greenmail. D. A poison pill. E. A white knight.

C. Greenmail.

(Exam 1) 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: A. Filing fee. B. Under price amount C. Gross spread. D. New issue premium. E. Offer price.

C. Gross spread.

(Exam 2) Which one of the following makes the capital structure of a firm irrelevant? A. Taxes. B. Interest tax shield. C. Homemade leverage. D. Debt-equity ratio that is greater than 0 but less than 1. E. 100 percent dividend payout ratio.

C. Homemade leverage.

(Exam 2) A flexible short-term financial policy: A. Maximizes cashouts. B. Increases shortage costs due to frequent cash-outs. C. Incurs more carrying costs than a restrictive policy. D. Tends to decrease sales as compared to a restrictive policy. E. Requires only a minimum investment in current assets.

C. Incurs more carrying costs than a restrictive policy.

(CH26) Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two competitors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas. This new firm is defined as a: A. Consolidation. B. Strategic alliance. C. Joint venture. D. Merged alliance. E. Takeover project.

C. Joint venture.

(Exam 2) Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at any time over the next year. This arrangement is called a(n): A. Floor loan. B. Open loan. C. Line of credit D. Bank note. E. Compensating balance.

C. Line of credit

(Exam 2) The fact that flotation costs can be significant is an argument for: A. Issuing larger regular dividends than the industry norm. B. Maintaining a constant dividend policy even if the firm frequently has to issue new shares. C. Maintaining a low dividend policy and rarely issuing extra dividends. D. Periodic extra dividend payments. E. Maintaining a constant dividend policy even when profits decline significantly.

C. Maintaining a low dividend policy and rarely issuing extra dividends.

(Exam 1) Jenner's is a multi-division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to: A. Become less risky over time based on the projects that are accepted. B. Avoid risky projects so it can receive more project funding. C. Prefer higher risk projects over lower risk projects. D. Have an equal probability with all the other divisions of receiving funding. E. Receive less project funding if its line of business is riskier than that of the other divisions.

C. Prefer higher risk projects over lower risk projects.

(CH26) KN Markets has decided to acquire a controlling interest in BJ's by purchasing shares of BJ stock in the public markets. Which one of these statements correctly applies to this acquisition? A. This method of acquisition guarantees a quick and efficient merger. B. KN Markets is limited by law to obtaining a maximum of 80 percent of the shares prior to obtaining the approval of BJ management. C. The purchase of publicly traded shares may be more expensive than an outright merger. D. Once KN Markets obtains 80 percent of BJ's shares, the remaining BJ shareholders will be required to sell their shares to KN. E. KN Markets must obtain the approval of BJ's board of directors before purchasing shares.

C. The purchase of publicly traded shares may be more expensive than an outright merger.

(Exam 1) Which of the following statements about raising capital is FALSE? A. Red herring is a preliminary prospectus. B. IPOs are underpriced, on average, when comparing the offer price with the first-day trading price. C. When firms announce SEOs, their stock prices go up, on average. D. A qualified firm can file one-time shelf registration that allows it to raise capital multiple times over a two-year period. E. A lockup agreement of an IPO prevents insiders from selling their shares for a specified time period.

C. When firms announce SEOs, their stock prices go up, on average.

(Exam 1) Which one of the following is a use of cash? A. Decrease in accounts receivables. B. Decrease in inventory. C. Increase in long-term debt. D. Decrease in accounts payable. E. Decrease in fixed assets.

D. Decrease in accounts payable.

(CH26) All of the following are required for an acquisition to be considered tax-free except: A. The continuity of equity interest. B. A business purpose, other than avoiding taxes, for the acquisition. C. The payment of equity shares in the acquirer to the target firm's shareholders. D. A cash payment to the target firm's shareholders. E. The receipt of an equity interest in the acquirer by the target firm's shareholders.

D. A cash payment to the target firm's shareholders.

(Exam 2) The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the: A. Accounts receivable period. B. Operating cycle. C. Inventory period. D. Accounts payable period. E. Cash cycle.

D. Accounts payable period.

(CH26) A potential merger that produces synergy: A. Should be rejected due to the projected negative cash flows. B. Should be rejected because the synergy will dilute the benefits of the merger. C. Has a net present value of zero. D. Creates value and therefore should be pursued. E. Reduces the anticipated net income from the target firm.

D. Creates value and therefore should be pursued.

(Exam 2) Holding assets constant, the optimal capital structure has been achieved when the: A. Debt-equity ratio is equal to 1. B. Debt-equity ratio is such that the cost of debt exceeds the cost of equity. C. Weight of equity is equal to the weight of debt. D. Debt-equity ratio results in the lowest possible weighted average cost of capital. E. Cost of equity is maximized given a pretax cost of debt.

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

(CH26) A proposed acquisition is most apt to create synergy by: A. Decreasing the market power of the combined firm. B. Disbanding the distribution network of the combined firm. C. Eliminating any strategic advantages of the target firm. D. Increasing the utilization of the acquiring firm's assets. E. Increasing the overhead costs.

D. Increasing the utilization of the acquiring firm's assets.

(CH26) The current officers of MTC have decided to form a private investment group for the sole purpose of purchasing MTC. These individuals will borrow 90 percent of their offer price. The purchase of this firm is referred to as a: A. Conglomeration. B. Proxy contest. C. Merger. D. Leveraged buyout. E. Consolidation.

D. Leveraged buyout.

(Exam 1) The percentage of the next dollar you earn that must be paid in taxes is referred to as the _______ tax rate. A. Mean. B. Residual. C. Total. D. Marginal. E. Average.

D. Marginal.

(Exam 1) Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding. After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000. Which one of the following terms best describes this situation? A. Overallotment. B. Abnormal event. C. Green Shoe allocation. D. Percentage ownership dilution. E. Red herring allotment.

D. Percentage ownership dilution.

(CH26) Which one of the following generally has a flip-in provision that significantly increases the cost to a shareholder who is attempting to gain control over a firm? A. Golden parachute B. Standstill agreement C. Greenmail D. Poison pill E. White knight

D. Poison pill

(CH26) Family Travel is the sole shareholder in its subsidiary, FT Insurance. Family Travel has decided to divest itself of its insurance operations and does so by distributing the shares in the subsidiary to the shareholders of Family Travel. This distribution of shares is called a(n): A. Lockup transaction. B. Bear hug. C. Equity carve-out. D. Spin-off. E. Split-up.

D. Spin-off.

(CH26) The shareholders in the acquiring firm may not realize any significant gains from an acquisition. Which one of the following has not been suggested as a reason for this lack of gain? A. Management may have priorities other than the interests of the stockholders. B. The price paid for the target firm might equal the target firm's total value to the acquirer. C. Any synergy produced was paid to the target firm's shareholders. D. Target firm shares were exchanged for an equal value of acquiring firm shares. E. Anticipated merger gains may not be fully achieved.

D. Target firm shares were exchanged for an equal value of acquiring firm shares.

(CH26) The purchase accounting method requires that: A. The excess of the purchase price over the fair market value of the target firm be recorded as a onetime expense on the income statement of the acquiring firm. B. Goodwill be amortized on a yearly basis for financial statement purposes. C. The equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm. D. The assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm. E. The excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm.

D. The assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.

(CH26) Which one of the following statements is correct? A. An increase in the earnings per share as a result of an acquisition will increase the price per share of the acquiring firm. B. The price-earnings ratio must remain constant as a result of an acquisition that fails to create value. C. If firm A acquires firm B then the number of shares in AB will equal the number of shares of A plus the number of shares of B. D. The price-earnings ratio can decrease even when the net present value of a merger is equal to zero. E. Diversification is one of the greatest benefits derived from an acquisition.

D. The price-earnings ratio can decrease even when the net present value of a merger is equal to zero.

(CH26) If a merger creates synergy, then the: A. Merger is classified as a taxable transaction. B. Acquiring firm's shareholders will receive a one-time cash payment. C. Equity of the acquirer will increase by the amount of the synergy. D. Value of the merged firm exceeds the combined value of the separate firms. E. Target firm's shareholders will receive value equal to the current market value of the target firm plus the amount of synergy expected.

D. Value of the merged firm exceeds the combined value of the separate firms.

(CH26) An automaker recently acquired a windshield manufacturer. Which type of an acquisition was this? A. Horizontal B. Longitudinal C. Conglomerate D. Vertical E. Indirect

D. Vertical

(Exam 2) Financial risk is: A. Irrelevant to the value of a firm. B. A type of unsystematic risk. C. Inversely related to the cost of equity. D. The risk inherent in a firm's operations. E. Dependent upon a firm's capital structure.

E. Dependent upon a firm's capital structure.

(CH26) Which one of the following defensive tactics is designed to prevent a "two-tier" takeover offer? A. Bear hug B. Poison put C. Shark repellent D. Dual class capitalization E. Fair price provision

E. Fair price provision

(Exam 1) Mobile Units recently offered 30,000 new shares of stock for sale. The underwriters sold a total of 32,000 shares to the public at a price of $14.50 a share. The additional 2,000 shares were purchased in accordance with which one of the following? A. Red herring provision B. Quiet provision C. Lockup agreement D. Post-issue agreement E. Green shoe provision

E. Green shoe provision

(CH26) A firm may want to divest itself of some of its assets for all of these reasons except for the desire to: A. Cash out a profitable operation. B. Raise cash. C. Improve the strategic fit of its various divisions. D. Comply with antitrust regulations. E. Increase market share.

E. Increase market share.

(Exam 2) Which form of financing do firms prefer to use first according to the pecking-order theory? A. Common stock B. Regular debt C. Convertible debt D. Preferred stock E. Internal funds

E. Internal funds

(Exam 2) The owner of an American put option has the _______ an asset at a fixed price during a stated period of time. A. Obligation to sell B. Obligation to buy C. Obligation to trade D. Right to buy E. Right to sell

E. Right to sell

(Exam 1) A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: A. Total assets. B. Total equity . C. Net income. D. Taxable income. E. Sales.

E. Sales.

(CH26) Melvin was attempting to gain control of Western Wood Products until he realized that the existing shareholders in the firm had the right to purchase additional shares at a below-market price given his hostile takeover attempt. Thus, Melvin decided to forgo investing in this firm. What term applies to the tactic used by Western Wood Products to stave off this takeover attempt? A. Pac-man defense B. Shark repellent plan C. Golden parachute provision D. Greenmail provision E. Share rights plan

E. Share rights plan

(CH26) Davidson Global proposed splitting itself into four separate firms and its shareholders agreed. This split is referred to as a(n): A. Lockup transaction. B. Divestiture. C. Equity carve-out. D. Spin-off. E. Split-up.

E. Split-up.

(CH26) Johnson Co. and Peabody Enterprises are both manufacturers of plastic products. These two firms have decided to work together to find a more efficient way to recycle rejected products. Thus, the two companies are each going to assign two engineers to this project and have agreed to share any and all costs. This project is an example of a: A. Consolidation. B. Merged alliance. C. Joint venture. D. Takeover project. E. Strategic alliance.

E. Strategic alliance.

(Exam 1) RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following? A. Utilizing its fixed assets more efficiently than Sam's. B. Generating $1 in sales for every $1.26 in net fixed assets. C. Generating $1.26 in net income for every $1 in net fixed assets. D. Maintaining the same level of current assets as Sam's. E. Utilizing its total assets more efficiently than Sam's.

E. Utilizing its total assets more efficiently than Sam's.