Fin 701 Test 3

The cost of equity

= return required by shareholders

pertuity

Preferred stock is a

Red Herring

What one of the following is a preliminary prospectus?

The cost of debt

= the required return on a company's debt

declaration date

A $0.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business becomes a liability of the company on the:

both the returns currently required by its debtholders and stockholders

A company's current cost of capital is based on:

is the return investors require on the total assets of the firm

A company's weighted average cost of capital:

maximizes the value of the firms

A firm should select the capital structure that:

Cost of Equity

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?

a $1 par value to $4

A one-for-four reverse stock split will increase:

Decrease in the number of shares outstanding without affecting total owners' equity

A reverse stock split is defined as a(n)

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

A stock repurchase program:

group of underwriters sharing the risk of selling a new issue of securities

A syndicate can best be defined as a:

tombstones

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

Rights offer

Alberto 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?

A reduction in the risk-free rate

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

Provides better returns to issuing firms

All of the following are supporting arguments in favor of IPO under-pricing except which one?

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

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

greater sensitivity of EPS to changes in EBIT

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:

Thursday, March 20

Bailey's decided on Friday, March 7 to pay a dividend of $0.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?

Percentage ownership dilution

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?

Dutch Auction

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?

underwriter

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

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

Existing shareholders:

dependent upon a company's capital structure

Financial risk is:

Stock repurchase

HJ Coroporation has excess cash and has opted to buy some of its outstanding shares. What is the process of buying called?

increase the average risk level of the company over time

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

Firm Commitment

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?

Kate is entitled to the dividend but Ted is not

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

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

M&M Proposition I with tax implies that the:

$68,600

Mario's has 24,000 shares of stock outstanding with a par value of $1 per share and a market price of $11.40 a share. The balance sheet shows $68,600 in capital in excess of par value account, and $34,910 in the retained earnings account. The company just announced a stock split of three-for-one. What will be the capital in excess of par account value after the split?

Green Shoe Provision

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?

Shelf registration

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

2 years

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:

Cost of debt

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

quiet

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.

Weighted average cost of capital

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

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

The business risk of a company:

clientele

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.

yield to maturity

The cost of deb is equal to the

Rate of return on a perpetuity

The cost of preferred stock is computed the same as the:

indirect banruptcy

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

all clienteles are satisfied

The dividend market is in equilibrium when:

2

The ex-dividend date is defined as ___ business day(s) prior to the date of record

direct bakruptcy

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as ____ costs.

Maintaining a low dividend policy and rarely issuing extra dividends

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

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

The interest tax shield is a key reason why:

Weighted average cost of capital

The minimum return a company needs to earn to satisfy all of its investors, including stockholders, bondholders, and preferred stockholders.

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

The optimal capital structure has been achieved when the:

Maximizes the value of that company's marketed claims

The optimal capital structure of a company:

the static theory of capital structure

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

appropriate discount rate

The required return is the same as the

cost of equity

The return required by equity investors given the risk of the cash flows from the firm.

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

The securities and Exchange Commission:

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

The subjective approach to project analysis

weighted average cost of capital in minimized

The value of a firm is maximized when the:

-Dividend growth model -SML or CAPM

Two major methods for determining the cost of equity.

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

Underwriters generally:

Wednesday, October 29

United Foods declared a dividend of $0.62 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?

Interest Tax Shield

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?

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

What is a prospectus?

General Cash Offer

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

The financial market-s reaction to a change in the amount of a company's dividend

What is information content effect?

pure play

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.

Date of record

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

Stock split

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

A 50 percent decrease in the par value per share

Which one of the following is a direct result of a two-for-one stock split?

Supporting the market price for a new securities issue

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

Dividend payment to shareholders

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

Business Risk

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

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

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

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

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

M&M Proposition I, no tax

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

Issues of less than $5 million

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

A decrease in the company's tax rate

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

Special Dividend

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

All successful bidders pay the same price per share

With Dutch auction underwriting:

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

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

The coupon rate

the firm's promised interest payment's on existing debt.