Corporate Finance - Midterm

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

2 years.

What is a prospectus?

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

Western Wear is considering a project that requires an initial investment of $602,000. The firm maintains a debt-equity ratio of .55 and has a flotation cost of debt of 4.9 percent and a flotation cost of equity of 10.2 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs?

Average flotation cost = (1/1.55)(0) + (.55/1.55)(.049) Average flotation cost = .0174, or 1.74% Initial cost = $602,000/(1 − .0174) Initial cost = $612,652

Rodriguez Printing has a current market value of equity of $32,400. Currently, the firm has excess cash of $2,100, total assets of $22,400, net income of $3,210, and 800 shares of stock outstanding. The company is going to use all of its excess cash to repurchase shares of stock. What will the stock price per share be after the stock repurchase is completed?

Current price per share = $32,400/800 Current price per share = $40.50 Shares repurchased = $2,100/$40.50 Shares repurchased = 51.85 New shares outstanding = 800 − 51.85 New shares outstanding = 748.15 New equity = $32,400 − 2,100 New equity = $30,300 New price per share = $30,300/748.15 New price per share = $40.50

Which one of the following statements is correct concerning the issuance of long-term debt?

Direct placement debt tends to have more restrictive covenants than publicly issued debt.

Which one of the following statements related to dividend policy is correct?

Dividend policy focuses on the timing of dividend payments.

Shares of Hetsko have been selling with rights attached. Starting tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?

Ex-rights date

Mackenzie is the CEO of Donihoo Corporation, a privately held corporation. If she wants to take Donihoo public, what must be her first step?

Gain board approval

Cervantes recently offered 60,000 new shares of stock for sale. The underwriters sold a total of 73,400 shares to the public at a price of $18.20 per share. The additional 13,400 shares were purchased in accordance with which one of the following?

Green Shoe provision

Glendale Paving currently has 45,000 shares of stock outstanding that sell for $38 per share. Assume no market imperfections or tax effects exist. What will be the new share price if the firm declares a stock dividend of 22 percent?

New price = $38(1/1.22)New price = $31.15

Abigail owns 6,000 shares of High Watermark common stock, which are currently trading for $24.00 per share. The company has announced a 4-for-1 stock split. After the split, how many shares will Abigail own, and how much will the shares be worth?

New shares = (6,000)(4/1)New shares = 24,000 shares New value = $24(1/4)(24,000)New value = $144,000

Mountain Products has decided to raise $6 million via a rights offering. The company will issue one right for each share of stock outstanding. The subscription price is set at $20 per share. The current market price of the stock is $25.20 and there are 1,500,000 shares currently outstanding. What is the value of one right?

Number of new shares = $6,000,000/$20 Number of new shares = 300,000 Number of rights needed = 1,500,000/300,000 Number of rights needed = 5 Cost per share = [$20+ 5($25.20)]/(1 + 5) Cost per share = $24.33 Value of a right = $25.20 − 24.33 Value of a right = $.87

Which one of the following is a result of a stock repurchase?

PE ratio equal to that resulting from a comparable cash dividend

What is a seasoned equity offering?

Sale of newly issued equity shares by a publicly owned company

Which one of the following involves a payment in shares that increases the number of shares a shareholder owns but also decreases the value per share?

Stock dividend

Plyler Cabinets declared a dividend of $1.32 per share on May 30 to holders of record on Monday, June 12. The dividend is payable on June 16. Sara purchased 300 shares of this stock on Friday, June 9. How much dividend income will she receive on June 12 from these shares?

Sara will not receive any dividend income because she purchased the shares on the ex-dividend date.

A public interview with an issuer's CFO could cause a forced delay in the issuer's IPO?

True

The optimal capital structure has been achieved when the:

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

All else equal, on the ________, the market value of a stock will tend to decrease by roughly the after tax value of the dividend.

ex-dividend date

Bleakly Enterprises has a capital structure of 56 percent common stock, 4 percent preferred stock, and 40 percent debt. The flotation costs are 3.7 percent for debt, 4.8 percent for preferred stock, and 5.2 percent for common stock. The corporate tax rate is 21 percent. What is the weighted average flotation cost?

fA = .56(.052) + .04(.048) + .40(.037) fA = .0458, or 4.58%

If a company has the optimal amount of debt, then the:

value of the levered company will exceed the value of the unlevered company. Correct

Clubb Coffee wants to raise $20.8 million to expand its global coffee roasting operations. The company estimates the issue costs for legal and accounting fees will be $311,000. The underwriters have set the stock price at $30.50 per share and the underwriting spread at 8.2 percent. How many shares of stock must be sold to meet this cash need?

Shares to be sold = [($20,800,000 + 311,000)/(1 − .082)]/$30.50 Shares to be sold = 753,991

Which one of the following statements is accurate?

The optimal capital structure maximizes shareholder value.

Hager Lifts has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: 600 shares at $37 per share, 800 shares at $36 per share, 900 shares at $35 per share, 200 shares at $34 per share, and 100 shares at $32 per share. How much will the company receive in total from selling the 1,800 shares? Ignore all transaction and flotation costs.

Total cash received = 1,800($35) Total cash received = $63,000

Trieu Group decided to go public by offering a total of 135,000 shares of common stock to the public. The company hired an underwriter who arranged a firm commitment underwriting and an initial selling price of $24 per share with a spread of 8.3 percent. As it turned out, the underwriters only sold 122,400 shares to the public. What is the amount paid to the issuer?

Total cash received = 135,000($24)(1 − .083) Total cash received = $2,971,080

Riojas, Incorporated, is an all-equity firm with a weighted average cost of capital of 13.3 percent. The current market value of its equity is $4.2 million. Assume there are no taxes. According to M&M Proposition I, what will be the value of the company if it changes to a debt-equity ratio of .62?

VL = VE = $4,200,000

Kline Construction is an all-equity firm that has projected perpetual EBIT of $308,000. The current cost of equity is 12 percent and the tax rate is 21 percent. The company is in the process of issuing $924,000 worth of perpetual bonds with an annual coupon rate of 6.2 percent at par. What is the value of the levered firm? Multiple Choice

VU = $308,000(1 − .21)/.120 VU = $2,027,667 VL = $2,027,667 + .21($924,000) VL = $2,221,707

L.A. Clothing has expected earnings before interest and taxes of $63,300 in perpetuity, an unlevered cost of capital of 14.7 percent, and a combined tax rate of 23 percent. The company also has $11,000 of debt that carries a coupon rate of 7 percent. The debt is selling at par value. What is the value of this company?

VU = [$63,300(1 − .23)]/.147VU = $331,571 VL = $331,571 + .23($11,000)VL = $334,101

If you ignore taxes and costs, a stock repurchase will:

increase the earnings per share.

According to the pecking-order theory, firms prefer to use ________ before any other form of financing.

internal funds

Existing shareholders:

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

The capital structure that maximizes the value of a company also:

minimizes the cost of capital.

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

When an issuer offers new securities to the general public, it must file a(n) ________ with the SEC to disclose all material information about the issuer.

registration statement

The Securities and Exchange Commission:

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

The interest tax shield is a key reason why:

the net cost of debt is generally less than the cost of equity.

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.

the static theory of capital structure

The Daily Brew has a debt-equity ratio of .57. The firm is analyzing a new project that requires an initial cash outlay of $260,000 for equipment. The flotation cost is 9.1 percent for equity and 4.4 percent for debt. What is the initial cost of the project including the flotation costs?

Average flotation cost = (1/1.57)(.091) + (.57/1.57)(.044) Average flotation cost = .0739, or 7.39% Initial cost = $260,000/(1 − .0739) Initial cost = $280,758