FINC312 Exam 3

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

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

________ risk is the type of equity risk that is most related to the daily operations of a firm.

Business

According to ________, the value of a company is unrelated to its capital structure.

M&M Proposition I, no tax

According to ________, the cost of equity capital is directly and proportionally related to capital structure.

M&M Proposition II

Which one of the following statements is accurate?

The optimal capital structure maximizes shareholder value.

Which one of the following favors a low dividend policy?

The tax on capital gains is deferred until the gain is realized.

Hasan Electric declared a dividend of $.48 per share on Monday, October 18. The dividend will be paid on Monday, November 15, to shareholders of record on Friday, October 29. Which one of the following is the ex-dividend date?

Thursday, October 28

M&M Proposition II, without taxes, is the proposition that:

a company's cost of equity is a linear function with a slope equal to (RA − RD).

The common stock of Battle Gaming has historically had a low dividend yield, and that circumstance 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.

clientele

When employing the flow-to-equity approach to calculate NPV, the appropriate discount rate is the:

cost of equity for the levered firm.

The optimal capital structure has been achieved when the:

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

Financial risk is:

dependent upon a company's capital structure.

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

direct bankruptcy

The flow-to-equity (FTE) approach in capital budgeting is defined as the:

discounting of a project's levered cash flows to the equityholders at the required return on equity.

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

ex-dividend date

Subsidized financing ________ the APV ___________.

increases; by decreasing the interest on the debt

In an effort to avoid bankruptcy, a firm may incur certain costs, called ________ costs.

indirect bankruptcy

An investor is more likely to prefer a high dividend payout if that investor:

is a corporation.

A(n) _____ dividend is considered to be a one-time event that will not be repeated.

special

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 last date on which you can purchase shares of stock and still receive the next dividend is the date that is _____ business day(s) prior to the date of record.

two

M&M Proposition I with tax implies that the:

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

The value of a firm is maximized when the:

weighted average cost of capital is minimized.