quiz 3 mgmt 109

estimated return

(expected price-current price)+ dividend= x..... x/ current price

The beta of the market portfolio is

+1.0

If a firm uses the same company cost of capital for evaluating all projects, which situation(s) will likelyoccur?

1,2,3. ) The firm will reject good low-risk projects, The firm will accept poor high-risk projects, AND The firm will correctly accept projects with average risk

stock repurchase methods:

1. buy share on the market 2. tender offer to shareholders 3. dutch auction 4. private negotiation (green mail)

why repurchases> dividends

1. to dispose of excess cash.. 2. to make big changes in capital structure... 3. avoid a commitment

Two Fund Separation Theorem

2 main sources of portfolio returns-- risk free rate AND market exposure w the assumption that markets are efficient.

How can an investor earn more than the return generated by the tangency portfolio and still stay on the securitymarket line?

Borrow at the risk-free rate and invest in the tangency portfolio.

Which of the following lists events in chronological order from earliest to latest?

Declaration date, ex-dividend date, record date

Which of these dates, when arranged in chronological order, occurs last?

Dividend payment date

debt

EBIT and ROIC

direct costs

IPOS, SEOS, convertibles, bonds

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Investment policy is independent of dividend policy.

The capital asset pricing model (CAPM) states which of the following?

The expected risk premium on an investment is proportional to its beta.

Trade off theory

Theory that capital structure is based on a trade-off between tax savings and distress costs of debt

Suppose a firm sets aside assets to protect particular investors such as debt holders. These assets are called

collateral.

declaration date

company declares regular quarterly dividend

Using a company's cost of capital to evaluate a project is

correct for projects that have average risk compared to the firm's other assets

payment date

dividend checks are mailed

record date

dividend will be paid to shareholders registered on this date

Firms can pay out cash to their shareholders in the following way(s):

dividends and share repurchases.

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because:

dividends are taxed when distributed, while capital gains are deferred until the stock is sold.

Complete the following sentence. The cost of capital is the same as the cost of equity for firms that are financed...

entirely by equity

Select the answer that best completes the following sentence. By combining lending and borrowing at the risk-free rate with efficient portfolios, we can

extend the range of investment possibilities, change the set of efficient portfolios from being curvilinear to a straight line, and provide a higher expected return for any level of risk, except for the tangential portfolio and the risk-free asset.

The company cost of capital is the correct discount rate for any project undertaken by the company.

false

If external finances are required...

firms issue the safest securities first like debt and then hybrid securities

pecking order theory

firms prefer to issue debt rather than equity if internal finance is insufficient

setting dividend policy

forecast capital needs (often 5 yrs), set target capital structure, estimate annual equity needs, set target payout, maintain target dividend growth rate

FCFF

free cash flow to the firm

Security Market Line (SML)

graphical representation of the expected return-beta relationship of the CAPM

issuing firms want

high prices

the hurdle rate should be _________ for riskier projects

higher

higher debt means

higher interest expense is tax deductible

Higher expected return is accompanied by _______________.

higher risk

compare the required return to an estimate

if they are equal they are properly valued

Leverage can ________________ expected ROE, but adds _______________.

improve; risk

Leverage _______ performance in better scenarios and _________ in a bad scenario

improves; makes things worse

The main advantage of debt financing for a firm is that

interest expenses are tax deductible.

investment theory

investment theory suggests that an investment is an adjustment to the capital stock over a specific period

tax preference

investors prefer low payout, hence the growth

basic earnings power is ________ by debt.

is unaffected

lead underwriter customers are:

issuing firms, investors

investors want

low prices

Higher interest expense means

lower income before taxes which means lower taxes

implied market risk premium

market rate- risk free rate

residual model advantages

minimizes new stock issues and flotation costs

indirect costs

money on the table/ end of the day price

primary/new markets

new securities are sold and funds go to the issuer company..

CAPM

optimal allocation line for investors

Capitla market line

optimal allocation line for investors

if required return is > estimated return

overvalued

secondary/ old markets

previously issued securities that are bought and sold by investors

When a company sells an entire issue of securities to a small group of institutional investors like life insurancecompanies, pension funds, and so forth, it is called a(an)

private placement.

Generally, underwriters provide the following services to the issuing firm (issuance of stock, for example):

provide advice, buy some or all of the new issue, and resell the issue to the public.

portfolio theory

quantifies risk, focuses on diversification, and adding low correlated assets

forms of distribution/ dividend payments

regular cash div, special cash div, stock div, stock repurchase

When a firm improves (lowers) its days of inventory it generally:

releases cash locked up in inventory.

disadvantages to residual model

results in variable dividends, sends conflicting signals, increases risk, and doesn't appeal to any specific clientele

ex dividend date

shares start to trade ex dividend

When comparing levered vs. unlevered capital structures, leverage works to increase EPS for higher levels of operating income because interest payments on the debt

stay fixed, leaving more income to be distributed over fewer shares.

utility maximization investors use

the Markowitz Model of portfolio diversification to optimize risk and return

Dividend policy changes are decided and announced by

the board of directors.

if the firm has less cash

the firm first draws down cash balance or sells marketable securities

CAPM utilizes the idea of

the risk free asset and markets being efficient meaning they are completely competitive and frictionless

if the firm has more cash

they pay off debt or invest in marketable securities

This question is to help with a conceptual background of Beta as a measure of risk. An analyst computes a beta coefficient with a low standard error. This implies that

this particular beta is more reliable than most.

An analyst should evaluate each project at its own opportunity cost of capital. The true cost of capital depends on the particular use of that capital.

true

Financial leverage increases the expected return and risk of the shareholder.

true

Investors require higher returns on levered equity than on equivalent unlevered equity.

true

Most firms have long-run target dividend payout ratios.

true

Generally, initial public offerings (IPOs) are

underpriced.

if required return is < estimated return

undervalued

EV

value of the firm

what is needed in order to optimize a portfolio according to portfolio theory

variance/standard deviation, expected return, correlation

WACC

weighted average cost of capital

bird-in-the-hand

when investors prefer a high payout