Quiz 3
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:
2 years.
If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor high risk projects over low risk projects. IV. increase its overall level of risk over time.
I, II, III, and IV
Which of the following have been offered as supporting arguments in favor of IPO underpricing? I. Underpricing counteracts the "winner's curse". II. Underpricing rewards institutional investors for sharing their opinions of a stock's market value. III. Underpricing diminishes the underwriting risk of a firm commitment underwriting. IV. Underpricing reduces the probability that investors will sue the underwriters.
I, II, III, and IV
The value of a right depends upon: I. the number of rights required to purchase one new share. II. the market price of the security. III. the subscription price. IV. the price-earnings ratio of the stock
I, II, and III only
The aftertax cost of debt generally increases when: I. a firm's bond rating increases. II. the market rate of interest increases. III. tax rates decrease. IV. bond prices rise.
II and III only
Which of the following statements are correct? I. The SML approach is dependent upon a reliable measure of a firm's unsystematic risk. II. The SML approach can be applied to firms that retain all of their earnings. III. The SML approach assumes a firm's future risks are similar to its past risks. IV. The SML approach assumes the reward-to-risk ratio is constant.
II, III, and IV only
Miller & Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering?
Regulation A
All new interstate security issues are regulated by the:
Securities Act of 1933.
T/F Existing shareholders may or may not have a preemptive right to newly issued shares.
TRUE
Which one of the following statements is correct for a firm that uses debt in its capital structure? - The WACC should decrease as the firm's debt-equity ratio increases. - When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred. - The firm's WACC will decrease as the corporate tax rate decreases. - The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share. - The WACC will remain constant unless a firm retires some of its debt.
The WACC should decrease as the firm's debt-equity ratio increases.
Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure.
The model is dependent upon a reliable estimate of the market risk premium.
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. - a reduction in the dividend amount - an increase in the dividend amount - a reduction in the market rate of return - a reduction in the firm's beta - a reduction in the risk-free rate
a reduction in the risk-free rate
An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:
an IPO is undersubscribed.
The subjective approach to project analysis
assigns discount rates to projects based on the discretion of the senior managers of a firm.
Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the:
cost of debt.
Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?
ex-rights date
What is an issue of securities that is offered for sale to the general public on a direct cash basis called?
general cash offer
The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:
gross spread.
The aftertax cost of debt
has a greater effect on a firm's cost of capital when the debt-equity ratio increases.
A firm's overall cost of equity is:
highly dependent upon the growth rate and risk level of the firm.
The date on which a shareholder is officially listed as the recipient of stock rights is called the:
holder-of-record date
A firm's cost of capital depends on
how the funds raised are going to be spent.
Incorporating flotation costs into the analysis of a project will:
increase the initial cash outflow of the project.
When a firm has flotation costs equal to 7 percent of the funding need, project analysts should
increase the initial project cost by dividing that cost by (1 - 0.07).
The Securities and Exchange Commission
is concerned only that an issue complies with all rules and regulations.
The cost of preferred stock:
is equal to the dividend yield.
The dividend growth model:
is only as reliable as the estimated rate of growth.
If an IPO is underpriced then the issuing firm receives ____________ than it probably should have.
less money
Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excitement has an aftertax cost of capital of 11 percent. Both firms are considering building wilderness campgrounds complete with man-made lakes and hiking trails. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project?
neither Wilderness Adventures nor Travel Excitement
Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase the unsubscribed shares. Which one of the following will allow her to do so?
oversubscription privilege
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.
quiet
Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that 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?
rights offer
What is a seasoned equity offering?
sale of newly issued equity shares by a firm that is currently publicly owned
Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed. She knows a venture capitalist who has offered to finance her business to the point where she would be ready to begin the manufacturing and marketing stage. Which type of financing is Suzie being offered?
seed money
A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.
standby
Direct business loans typically ranging from one to five years are called:
term loans.
The flotation cost for a firm is computed as:
the weighted average of the flotation costs associated with each form of financing.
Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:
tombstones
Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n):
underwriter
The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:
weighted average cost of capital.
