FIN3414 Exam 3
Retailers; Automotive
(blank) and (blank) firms fluctuate with the business cycle
Transportation; utilities
(blank) firms and (blank) are less dependent upon the business cycle
Milking the Property
(ex.) paying out extra dividends or other distributions in times of financial distress, leaving less in the firm for the bondholders
In a 12 month period, a company is permitted to raise a max of what through crowd funding?
1 million
What is the WACC formula for a firm with no debt or preferred stock?
1 x Cost of Equity
If the firm issued so much debt that its equity was valueless, its average cost of capital would equal?
1 x the after tax cost of debt
Factors that Encourage High Dividend Payout
1) desire for current income 2) conforming to behavioral finance 3) the need to reduce agency costs 4) dividend signaling
A. Three Selfish Behaviors of Stockholders
1) taking risks 2) underinvestment 3) milking the property
How long is the waiting period once a registration statement is filed with the SEC for a new issue?
20 days
A relatively new, unprofitable firm that is currently selling its product but needs additional working capital will seek which stage of Venture Capital financing?
2nd round financing
Venture Capitalists will often require what?
40% or more of firm's equity several seats on the company's BOD
Internal; external; external
According to pecking order theory, (blank) equity is better to issue than (blank) equity due to the negative signaling implications (blank) financing brings.
Undervalued
According to pecking order theory, if managers believe the stock is (blank), they will issue bonds that have little to no risk of default.
Overvalued
According to pecking order theory, managers only will issue new stock if the stock is (blank).
A individual or group or individuals, that fund a new start-up company are referred to as what?
Angel Investors
What do we know about the stability of a firm's Beta?
Beta changes over time Beta are more likely to be stable if firm in same industry
Declaration Date
Board of Directors declares a payment of dividends
Firms with high standard deviations?
Can sometimes have HIGH betas Can something have LOW betas
A point plotted SML represents a project being considered by an all-equity firm, the project's IRR must be greater than the cost of ?
Capital and Equity
What are general characteristics of Venture Capitalists
Desire of an exit strategy Frequent involvement In BOD of firms receiving funding Function as a Financial Intermediary
With the ___ method of issuing securities, the underwriter determines the offer price based on the submitted bids
Dutch auction underwriting
A firm should only undertake a project if its expected return is ____ that of a financial asset of comparable risk.
Equal to or greater than
The payment to lawyers become relent in the context of Capital structure decisions in the event of ?
Financial Distress
High; low
Firms with (blank) fixed costs and (blank) variable costs are said to have high operating leverage
Low; high
Firms with (blank) fixed costs and (blank) variable costs are said to have low operating leverage
Why do bond covenants restrict high-risk investments by shareholders during financial distress?
High risk projects tend to transfer wealth from the bondholders to the shareholders
Well; poorly
Highly cyclical firms do (blank) in the expansion phase of the business cycle and do (blank) in the contraction phase.
Higher
Highly cyclical stocks have (blank) betas
Brokers who sell stock on MARGIN will protect themselves by?
Holding the stock as collateral Requiring additional cash contributions from the investor Selling stock to satisfy the loan
Same; same
If WACC is used as the hurdle rate, the project risk must be the (blank) as the firm's and the project must also use the (blank) mix of debt and equity as the firm does
Firm's Beta
If you believe that the operations of the firm are fundamentally different from the operations of the rest of the industry, you should use the
Industry Beta
If you believe that the operations of the firm are similar to the operations of the rest of the industry, you could use the
Total Debt (Rb)
In the WACC equation, the term that best captures financial distress would be (blank) because the only way to incur costs of financial distress is too have issued too much debt.
What is true about WACC?
It is the expected return a firm must earn on its existing assets to maintain its current value It is also referred to as the Discount Rate that is used to discount cash flows in capital budgeting problems
What can change Beta over time?
Leverage Product line Technology
Higher
Levered firms have a (blank) beta than unlevered firms
The sales of cyclical firms are ____ sensitive to the business cycle than are the sales of non-cyclical firms.
MORE
A firms cost of debt can be
Obtained by checking yields on publicly traded bonds Estimated easier than its cost of equity Obtained by talking to investment bankers
When is a new issue usually Priced?
On the last day of registration period
Under the MM propositions with no taxes, managers cannot change the value of the firm by repackaging its securities because ____?
Overall cost of capital cant be reduced As debt is added, equity becomes more risky
Preferred stock does?
Pays constant dividend Pays dividends in perpetuity
What are the advantages of using Internal financing?
Prevents the adverse market reaction that tends to accompany a stock issue It may be cheaper than debt or equity issues
The period of time before and after an IPO when communication with the public is limited is known as what?
Quiet Time
The preliminary prospectus, which contains much of the information found in the registration statement and is distributed to potential investors is called what?
Red Herring
According the CAPM, what is the expected return on a stock if its beta is equal to 0?
Risk free rate
What stage of VC financing is generally used to pay for marketing and product development expenditures?
Start Up
The WACC is the minimum return a company needs to earn to satisfy who?
Stockholder and Bondholders
The most difficult part of underwriting process for an IPO is determining the correct offer price T or F
TRUE
Under US tax law, a corporation's interest payments are tax deductible. T or F
TRUE
The available evidence indicated that there are pronounced cycles in what?
The # of IPOS The degree of IPO underpricing
What activities occur in the aftermarket period?
The Green Shoe provision may be exercised Underwriter may need to step in and purchase shares to establish a price floor
A corporation gains no value from an interest tax shield if what is true?
The corporation is an all equity firm The corporation has no debt Corporate tax rates are 0
What two things do you need to compute the beta for a company's stock?
The covariance btw the stock and the market index's returns The variance of the market index's returns
Fall
The stock price of a firm will generally (blank) when the firm announces a decrease in the dividend.
Rise
The stock price of a firm will generally (blank) when the firm announces an increase in the dividend.
What is true about US Treasury instruments?
They have never defaulted They are not expected to default at this time
An advertisement used after the registration-waiting period to announce a new securities issue is called?
Tombstone
Debt; financial distress
Trade off theory implies that a firm's capital structure decisions involve a trade-off between the tax benefits of (blank) and the costs of (blank); believes there is an optimal level of debt
A Dutch auction underwriting is also known as ?
Uniform price auction
Financing from wealthy individuals or private investment groups is referred to as?
Venture Capital
Increase
When debt levels increase or as the debt-equity ratio increases, Rs (the cost of equity) will (blank).
Less
a levered firm pays (blank) in taxes than an unlevered firm
M&M Proposition I (wo/taxes)
argues that a firm cannot change the total value of its outstanding securities by changing the proportions of its capital structure; meaning no capital structure is any better or worse than any other capital structure for the firm's stockholders. To summarize the value of the levered firm is the same as the value of the unlevered firm
MM Proposition II (wo/taxes)
argues that expected return on equity is positively related to leverage because since levered equity has greater risk, it should have a greater expected return as compensation
Cum-Dividend Date
buyer of stock still receives the dividend
Operating Leverage
degree which measures how sensitive a firm is to its fixed costs
Taking Risks
gambling with large amounts of money when the firm is nearing bankruptcy, because the firm believes they are betting other people's money
Higher Beta
higher operating leverage means:
Free Cash Flow
is the amount of cash the firm can pay out to investors after making all necessary investments for growth; better measure of value creation than dividend model
An agreement in an underwriting contract that prohibits insider shares from being sold immediately following an IPO is called what?
lock out period
Beta
measures the sensitivity of a stock's return to the return on the market portfolio
Operating Leverage
refers to the sensitivity to the firm's fixed costs of production
R(WACC)
reflects the risk and the capital structure of the firm's existing assets
Ex-Dividend Date
seller of the stock retains the dividend
M&M Proposition II (w/taxes)
some of the increase in equity risk and return is offset by the interest tax shield
Pecking Order Theory
states that firms prefer to issue debt rather than equity if internal finance is insignificant
Underinvestment
stockholders often find that a firm nearing bankruptcy, which continues to invest, will only help the bondholders at the stockholders' expense. Even if this additional investment can produce a positive NPV, the project will still not be taken unless it can prevent bankruptcy
Record Date
the corporation prepares a list of all individuals believed to be stockholders as of a certain date
M&M Proposition I (w/taxes)
the firm's value will increase with leverage
Financial Leverage
the sensitivity to a firm's fixed costs of financing; the extent to which a firm relies on debt
WACC
weighs the cost of equity and the cost of debt then averages them out