MGF 301 Exam 3

M&M Proposistion I states if the assets and operations (left-hand side of the balance sheet) for two firms are the same, then

- how the firms re financed is irrelevant - the value of the two firms is equal.

A stock dividend will result in which of the following?

-A decrease in value per share. -An increase in shares outstanding

Which of the following involves a firm distributing stock instead of cash to its owners?

-A stock dividend -A stock split.

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

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

Which of the following are direct costs of financial distress?

-Administrative expense -Legal fees

A corporation gains no value from an interest shield if which of the following are true?

-Corporate tax rates are zero. -The corporation is an all-equity firm. -The corporation has no debt.

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

-Cost of common stock -Cost of preferred stock -Cost of debt

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

-Discount rate -Required return -cost of capital

A firm can pay out its cash earnings to its shareholders in which of the following ways?

-Dividends -Share repurchases

A firm can use a shelf registration if ___.

-It hasn't defaulted on debt in the past 3 years. -It is rate investment grade -The firm's aggregate market value is more than 150 million.

A firm which pays dividends is signaling ____ and ____.

-It is not hoarding too much cash -It expects to continue to be profitable.

What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level?

-It will reject projects that it should have accepted -It will accept projects that it should have rejected -the firm overall will become riskier.

What are some examples of indirect financial distress costs?

-Lost sales -Lost reputations

Underwriter of an IPO usually do which of the following for the issue client?

-Sell the securities -Price the securities -Assist with the SEC registration process

which of the following are factors which favor a low dividend payout?

-Tax laws -bond covenant restrictions -floatation costs

Which of the following are examples of firms which filled for bankruptcy for strategic reasons?

-Texaco -Johns Manville -Continental Airlines -Dow Corning

How does the level of debt affect the weighted average cost of capital(WACC)?

-The WACC initially falls and then rises as debt increase.

Which of the following will apply when a firm's debt level are extremely high?

-The benefits of debt financing may be more than offset by the costs of financial distress. -The possibility of financial distress will become a chronic problem.

Which of the following are generally true about the cost of equity and the cost of debt?

-The cost of debt increases with leverage. -The cost of debt is generally lower than the cost of equity. -The cost of equity may increase with leverage.

Which of the following are costs of issuing new securities?

-Underpricing -The spread -The green shoe option

Rank each of the following in order of priority of payment.

1) Bankruptcy administrative expenses 2) Wages, salaries, and commissions 3) Consumer claims 4) Payment to common shareholders.

Place the steps involved in issuing securities to the public in chronological order.

1)Obtain approval from the firm's board of directors. 2)prepare and files a registration statement 3)Preparer and distribute preliminary prospectus copies 4)Determine a selling price 5)Prepare and distribute a final prospectus.

Which of the following industries tend to have high leverages?

Cable television Airlines

A firm's ability to pay dividends may be restricted by:

Covenants in a bond indenture.

With the ___ method of issuing securities, the offering price is determined by submitted bids.

Dutch auction

If the firm is all-equity, the discount rate is equal to the firm's cost of ____ capital.

Equity

Under the ___ method, the underwriter purchases all the shares to be offered.

Firm commitment

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

Other people's money.

The SEC's logic for requiring the "quiet period" is that all releant information should already be publicly available in the ____.

Prospectus

Dividends are heavily concentrated among a relatively ____ number of ____, mature firms.

Small; Large

A firm's capital structure refers to ____.

The firm's mix of debt and equity.

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

The risk-free rate

If a firm uses its overall cost of capital to discount cash flows from projects in higher risk divisions, it will accept ____ project.

Too many

What does WACC stand for?

Weighted average cost of capital.

WACC is used to discount ____ _____

cash flows.

According to M&M Proposition I, a firm's capital structure choices:

do not affect the value of the firm.

The date that establishes those individual entitled to a declared dividends is called the ____.

ex-dividend date.

The costs associated with the new issues are known as ____.

flotation costs

The first public equity issue made by a firm is called a ____.

initial public offering.

Components of the WACC include funds that come from ___.

investors.

A stock dividend is not a true dividend because

it is not paid in cash

Volatility or ____ increases for equity holders when leverage increase

risk

The tax savings attained by a firm from the tax deductibility of interest expense is called

the interest tax shield

The market for venture capital refers to:

the private financial marketplace for new, high-risk firms.

A firm's registration statement to issue securities will typically include all of the following expect:

the proposed price for the security.

A stock split increase the number of outstanding shares, while ____.

the total owner's equity remains constant.

The cost of capital depends primarily on the ____ of funds, not the ____.

use; source

Including preferred stock in the WACC formula adds which term if P is the market value of preferred stock and Rp is the cost of preferred?

(P/V)*Rp

A risk to the issuing firm of a "best efforts" underwriting agreement is ___>

-All the shares won't be sold -The issuing firm will not raise the needed capital

Underwriters of an IPO usually do which of following for the issuing client?

-Assist with the SEC registration process. -Price the securities -Sell the securities

Which of the following is true about stock dividends and stock splits?

-Both will increase the total number of shares -Both will reduce the share price.

Which of the following industries tend to have a low leverage?

-Computers -Drugs

In return for early stage financing, venture capitalists will frequently receive which of the following?

-Convertible preferred stock -Ability to name some management -Seats on the board

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

-Dividends to common stockholders are not fixed. -Dividends to preferred stockholders are fixed.

The following are advantages of the SML approach

-Does not require the company to pay a dividend. -Adjusts for risk.

which of following are important consideration when choosing between venture capitalists?

-Exit strategy -Financial strength -Style

The growth rate of dividends can be found using:

-Historical dividend growth rates. -Security analysts' forecasts

Which two of the following are broad types of costs of financial distress?

-Indirect costs -Direct costs

Which of the following is true relative to dividends?

-Investors will view a dividend cut as bad news -Dividend increase tend to lag earnings increase -Dividend stability is important

Bankruptcy is very valuable because:

-It can be used strategically to improve a firm's competitive position. -Payments to creditors cease pending the outcome of the bankruptcy process.

To estimate a firm's equity cost of capital using the CAPM, we need to know the ___.

-Market risk premium -risk-free rate -stock's beta

The tax shield afforded by debt will be of the least use to firms with ____.

-Negative EBT -Losses carried forward

Financing by wealthy individuals or private investment groups is referred to as ____.

-Private equity -Venture capital.

The following are disavantages of SML approach

-Requires estimation of the market risk premium -Requires estimation of beta

A company may consider a reverse stock split for which of the following reasons?

-To increase liquidity -To increase the share price to a "respectable" level -To meet exchange listing requirement -To reduce transaction costs to investors.

Which of the following are reasons why investors migh favor a high dividend payout?

-Transaction costs for selling low dividends stocks can be avoided -A preference for current income. -A preference for tax and legal benefits from dividends.

Which of the following is true about a firm's cost of debt?

-Yields can be calculated from observable data. -It is easier to estimate than the cost of equity.

A reverse stock split results in

-a higher share price -an investor owning fewer shares

The discount rate for the firm's project equal to the cost of capital for the firm as a whole when:

All projects have the same risk as that of the firm overall

During bankruptcy, the ownership of the firm's assets is transferred from stockholders to ___.

Bondholders.

The dividend growth model is applicable to companies that pay ___.

Dividends

____ is the term that describes the capital structure when debt is used to finance assets.

Financial leverage

The concept that stocks attract certain investors due to a firm's dividend policy and the resulting tax impact is called ____.

The clientele effect.

MM Proposistion II shows that

The cost of equity rises with leverage.

If a firm has multiple projects, each project should be discounted using ___.

a discounted rate commensurate with the project's risk.

An investor who invests in the stock of a levered firm rather than in an all-equity firm will require ____.

a higher expected return

Dividends paid to common stockholders ___ be deducted from the payer's taxable income for tax purposes.

cannot

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

equal to

An investor who buys the common stock of a levered firm is subject to more risk due to the addition of

financial risk

According to a recent survey, the highest priority for financial managers is to:

maintain a consistent dividend policy.

The value of a levered firm in MM Proposition I with corporate taxes equals the value of an all equity firms:

plus the tax rate times the value of debt

other companies that specialize only in projects similar to the project your firm is considering are called ___.

pure plays

The fee the underwriter receives for managing a securities issue is typically termed the ____.

spread

An alternative way to pay out a firm's earning to shareholders instead of cash dividends is a:

stock repurchase

The WACC is the overall rate of return the firm must earn on its existing assets to maintain the ___ of its stock.

value

For a firm with outstanding debt, the cost will be the ____ on that debt

yield to maturity