FIN 300 Exam 4 Study Guide

Marley Corporation issued shares to the public totaling $33 million. Approximately what amount would the company be expected to pay as an underwriter spread?

$2.31 million

If the market value is $45 million and the market value of equity is $105 million, the total firm value is __________ million.

$45 + 105 = 150 Million

What are the after tax earnings for HIJ Corporation if it reports 200 in revenue, 90 in operating expenses, has a tax rate of 21%, and pays 20 of interest to its bonds $71.1

$71.1

A firm's capital structure consists of 30 percent debt and 70 percent equity. Its bonds yield 10 percent, pretax, its cost of equity is 16 percent, and the tax rate is 21 percent. What is its WACC?

(0.7 x .16) + (0.3 x .1 x (1-0.21)) = .1357x100 or 13.57

Suppose the risk-free rate is 5 percent, the market rate of return is 10 percent, and beta is 2. Find the required rate of return using the CAPM

(5%+(2*(10%-5%)) = 15%

Including preferred stock in the WACC adds the term:

(P/V) × RP

Which of the following are true about the venture capital (VC) market?

1. Access to venture capital is very limited. 2. Personal contacts are important in gaining access in the VC market.

Which of the following are components used in the construction of the WACC?

1. Cost of debt 2. Cost of preferred stock 3. Cost of common stock

What can we say about the dividends paid to common and preferred stockholders

1. Dividends to Common stockholders are not fixed. 2. Dividends to preferred stockholders are fixed

Which of the following are true?

1. Ideally, we should use market values in the WACC. 2. Book Values are often similar to market value of debt.

The WACC is the minimum return a company needs to earn to satisfy _____.

1. Its stockholders. 2. Its Bondholders

To estimate a firms equity cost of Capital using CAPM we need to know____

1. Market risk premium 2. Risk-free rate 3. Stock's beta

A firm's cost of debt can be

1. Obtained by checking yields on publicly traded bonds. 2. Estimated easier than its cost of equity. 3. Obtained by talking to investment bankers

The rate used to discount project cash flows is known as the _____

1. Required return 2. Cost of capital 3. Discount rate

Which of the following are important considerations when choosing between Venture Capitalists?

1. Style, 2. Exit strategy, 3. Financial strength

The SML approach requires estimates of:

1. The market risk premium 2. The beta coefficient

The available evidence indicates that there are pronounced cycles of which of the following?

1. The number of IPOs 2. The degree of IPO underpricing/pricing

Whether a firm obtains capital by debt or equity financing depends on:

1. The size of the firm 2. The firm's life-cycle stage 3. The firm's growth prospects

Which of the following are costs of issuing new securities?

1. The spread 2. Underpricing 3. The Green Shoe option

Which of the following are explanations of underpricing?

1. Under pricing occurs with smaller issues in order to attract investors. 2. Under pricing is a kind of insurance for the investment banks

To estimate the growth rate of a particular stock, we can _____

1. Use security analysts forecasts. 2. Use the historical dividend growth rate.

Financing from Wealthy individuals or private investment groups is referred to as ________ capital

1. Venture 2. Private

Private equity firms provide financing for firms that otherwise would have difficulties raising capital such as:

1. start-up firms 2. Closely held private firms 3. distressed firms

if a preferred stock pays a dividend of $2 per year and is selling for $20, its yield is:

10% 2/20 = .10

If an analyst's forecast for a firm's earnings growth is 7%, and its dividend yield is 3%, its cost of equity will be _____.

10%(Cost of Equity = Dividend yield + Growth rate = 3% + 7% = 10%)

A company has a borrowing rate of 15 percent and a tax rate of 21 percent. What is its aftertax cost of debt?

11.85% (15%*(1-0.21)

If an all-equity firm's beta is 2, the risk-free rate is 3%, and the historical market risk premium is 7%, what is the firm's cost of capital? 17%

17%

WACC was used to compute the following project NPVs: Project A = $100, Project B = -$50, Project C = -$10, Project D = $40. Which project should the firm accept?

A and D

Dilution of the ownership of existing shareholders can be ________ with a right offering.

Avoided

In the ________ method of issuing securities, the underwriting syndicate avoids the risk of unsold securities.

Best efforts

With the ________ method of selecting a syndicate, the issuing firm offers its securities to the highest bidding underwriter.

Competitive offer

Which of the following are tax-deductible to the firm?

Coupon interest paid on bonds

To apply the dividend growth model to a particular stock, you need to assume that the firms ______ will grow at a constant rate.

Dividend

With ____ method of issuing securities, the underwriter determines the offer price based on submitted bids.

Dutch auction underwriting

The return an investor in a security receives is ____ ______ the cost of the security to the company that issued it.

Equal to

Dilution refers to loss in _____________ shareholders' value

Existing

An investment bank that underwrites a security issue by buying the securities for less than the offering price and accepting the risk that the securities wont sell is using the ____ method

Firm commitment

The cost associated with new issues are known as _______.

Flotation costs

According to a study by lee, Lockhead, Ritter and Zhao, direct expense across all offerings are ______ for equity offers than for debt offers.

Greater

Crowd funding typically uses the following to raise small amounts of capital from a large number of people:

Internet

An agreement in an underwriting contract that prohibits insider shares from being sold immediately following an IPO is called a _____ Period.

Lockup

_______ value of dilution is more important than ______ value of Dilution.

Market; book

In order to issue a security to the public, management's first step is to _______.

Obtain board approval

When is a new issue usually priced?

On the last/effective day/date of the registration period

In the world of start-up ventures, OPM stands for _______.

Other people's money

Most debt is ____.

Privately issued

The period of time before and after an IPO when communication with the public is limited is known as the ______ period.

Quiet

The market risk premium is defined as:

R_m - R_f

A document required by the SEC for new public issues that contains the issuing firms financial information, financial history, and details of existing business is known as the _______.

Registration statement

A project should only be accepted if its return is above what is ________.

Required by investors

Which of the following methods for calculating the cost of equity ignores risk?

The dividend growth model

The difference between the price the issuer receives and the offering price is _________

The gross spread

Which of the following variables is NOT required when using the CAPM to compute the cost of equity capital? 1. The rate of inflation 2. The market risk premium 3. The stock's beta 4. The risk-free rate

The rate of inflation

According to the CAPM, what is the expected return on stock if its beta is equal to zero?

The risk-free rates.

Finding a firm's overall cost of equity is difficult because:

There is no way of directly observing the return that the firm's equity investors require of their investment.

An advertisement used after the registration waiting period to announce a new securities issue is called a ________.

Tombstone

Economic Value Added (EVA) is a mean of evaluating corporate performance. T/F

True

ULC and LEV have earnings before interest and taxes of $110. LEV also has $20 of interest expense. Both companies are taxed at 21 Percent, ULC's aftertax earnings are _______, Which is _______ than LEV's aftertax earnings

ULC = $110 x (1-.21) = $86.9

Which one of the following is true?

Under U.S. tax law, a corporation's interest payments are tax deductible.

In the 1999-2000 time period, companies missed out on $67 billion because of ______.

Underpricing

If a cash offer is a public offer, a(n) _______ is usually involved.

Underwriter

A Dutch action underwriting is also known as a(n) ______ .

Uniform price auction

What does WACC stand for?

Weighted average cost of capital

A red herring is another name for a ______.

preliminary prospectus

The CAPM can be used to estimate the _______.

required return on equity

A new equity issue by a publicly traded firm is know as a(n) ______.

seasoned equity offering

An initial public offering (IPO) is also referred to as a(n) _______.

unseasoned new issue

A good source for bond quotes is:

www.finra.org/marketdata