Corporate Finance Exam 3 Written
Which type of investor is more likely to prefer a high dividend payout
Corporations
Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:
cost of debt
The Clientele Effect
Argument that stocks attract particular groups based on dividend yield and the resulting tax effects
Optimal Capital structure is achieved when
D/E ratio results in the lowest possible WACC
On the _________ the market value of the stock will decrease by roughly the aftertax value of the dividend
Ex-Dividend Date
(T/F) The tax on capital gains is deferred until the gain is realized favors a high divdend policy
False, Favors a low dividend policy
pecking order theory
Internal Funds Debt Funding Equity funding
According to ________ the cost of equity is directly and propotionally related to capital structure
MM Prop II
According to the _______, the cost of equity capital is directly and proportionally related to capital structure
MM Proposition 2
According to ________, the value of a company is unrelated to its capital structure
MM1 No tax
Hasan Electric declared a dividend on Monday, October 18. Paid on Nov 15, and shareholders of record on October 29, When is the ex-dividend date?
October 28th
A(n) _____ dividend is considered to be a one-time event that will not be repeated.
Special
Capital strucutre - the mixture of debt and equity is a
True
The last date that you can purchase shares of stock and still receive the next dividend is the date that is ______ days before the prior date of record
Two Days
MM Prop 1
WACC decreases as the debt-equity ratio increases
MM Prop 1 with tax
WACC decreases as the debt-equity ratio increases
Value of a firm is maximized when the
WACC is minimized
Financial Risk is dependent on
a company current capital structure
MM Prop II no tax
a company's cost of equity is a linear function with a slope equal to (Ra-Rd)
Chapter 7 Bankruptcy
a trustee will assume control of the company's assets until those assets can be liquidated
The absolute priority rule
determines which parties receive payment first in a bankruptcy proceeding
The explicit costs, such as legal and admisintrative expenses, associated with corporate default are classified as _________
direct bankruptcy costs
In an effort to avoid bankruptcy a firm may incur costs called ________
indirect bankruptcy costs
Bankruptcy
is a legal proceeding
A company is technically insolvent when
it is unable to meet its financial obligations.
The optimal capital structure
maxmizes shareholder value
The capital structure that maximizes the value of a company also
minimizes the cost of capital
According to _________ a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs
static theory of capital structure
Business Risk
the type of equity risk is most related to the daily operations of a firm
MM Prop 1 no tax claims that
the value of a company is unrelated to its capital structure
In general the capital structures of US firms
vary significantly across industries.