Combo with "Chapter 13" and 2 others

The dividend ____ states that investors will tend to be attracted to firms that have dividend policies consistent with the investor's objectives

a. "clientele effect"

In considering the arguments for the relevance of dividends, which of the following statements is/are correct? I. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains. II. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock.

a. I only

Which of the following would be considered an alternative dividend policy? I. Passive residual approach II. Increasing dollar dividend approach

a. I only

Sources of debt financing are classified according to their:

a. Maturities

Which of the following statements is (are) true concerning the relationship between the firm's cost of equity and its capital structure (as measured by the debt ratio)?

a. The exact relationship between the cost of equity and the debt ratio is difficult to determine.

Which of the following statements is true regarding the relationship between the firm's cost of debt and its capital structure (as measured by the debt ratio)?

a. The range of debt ratios where the cost of debt begins to increase rapidly varies by firm and industry, depending on the level of business risk.

The firm's receivables conversion period (measured in days) is equal to its accounts receivable divided by its ____.

a. annual credit sales/365

The optimal capital structure is determined by several factors including all of the following except:

a. corporate capital gains

The amount of debt in a firm's optimal capital structure is often referred to as the firm's:

a. debt capacity

The passive residual dividend policy asserts that

a. dividends should be paid out only if the firm does not have enough acceptable investment projects to utilize all earnings internally.

The use of fixed cost sources of funds, such as debt and preferred stock affect a firm's ____.

a. financial risk

Working capital policy involves day-to-day decisions that determine all of the following EXCEPT:

a. firm's level of long-term assets.

The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except

a. how efficient the firm manages its fixed assets

Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will

a. increase

Investors' required returns and the cost of equity capital ____ as the relative amount of debt used to finance the firm ____.

a. increase, increases

In a large, widely-held corporation, the financial manager should consider all of the following in establishing a dividend policy EXCEPT:

a. individual shareholder preferences

A firm's operating cycle is equal to its ____.

a. inventory conversion period plus receivables conversion period

According to Miller and Modigliani, it is ____ that really determines a firm's value.

a. investment policy

A firm's working capital position is important since::

a. it is a measure of risk.

Lenders normally feel that the relative risk associated with short-term debt is ____ the risk associated with long-term debt.

a. lower than

A legal constraint that dividends must be paid out of a firm's present and past net earnings is known as the ____ restriction.

a. net earnings

With an optimal capital structure

a. overall capital costs are minimized

Of the accounts listed, the account(s) that is (are) NOT part of a firm's working capital is:

a. plant and equipment

Basically the overall working capital policy decision involves a ____ of alternative policies.

a. profit-risk tradeoff

Financial leverage benefits shareholders when the

a. return on assets is greater than the cost of debt

On the ex-dividend date, the

a. seller of the stock is entitled to the dividend

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as

a. term structure of interest rates

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as the

a. term structure of interest rates

Net working capital represents:

a. the amount of current assets financed by noncurrent sources of funds.

A stock dividend will not affect which of the following balance sheet items.

a. total assets

When a firm purchases its own stock in the open market, the repurchased shares become known as ____.

a. treasury stock

____ refers to the argument that officers and managers have access to information about the expected future earnings of the firm that is not available to outside investors.

b. Asymmetric information

____ represents the permanent sources of the firm's financing.

b. Capital structure

_________________ determines the ultimate distribution of the firm's earnings between reinvestment and cash dividend payment to shareholders.

b. Dividend policy

With financial leverage, a change in EBIT results in a change in:

b. EPS

The dividend clientele effect concept was originally developed by

b. Merton Miller and Franco Modigliani

When a firm initiates the repurchase of stock through a tender offer, it is giving the shareholders:

b. a put option

The passive residual dividend policy seems to be inconsistent with

b. a stable dividend policy

The amount of permanent short-term debt, long-term debt, preferred stock, and common stock used to finance a firm defines the firm's

b. capital structure

The ____ shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firm's activities.

b. cash conversion cycle

The greater the variability of costs, the greater the business risk of the firm. This is reflected in the:

b. cost of inputs used to produce a firm's output

Net working capital is defined as:

b. current assets minus current liabilities

Finance researcher Myron Gordon argues that

b. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value

When the level of working capital is increased, all of the following are expected to occur except

b. expected profitability increases

Dividend payments reduce all of the following balance sheet items except

b. fixed assets

The rate of return on fixed assets is normally assumed to be ____ the rate of return on current assets (especially cash and marketable securities).

b. greater than

A firm with stable earnings is usually more willing to

b. have a higher dividend payout ratio

As the proportion of debt in the capital structure increases, investors require a ____ return and the value of existing debt will ____.

b. higher, decrease

Firms with the ____ earnings growth tend to have the ____ dividend payout ratio.

b. highest, lowest

The net effect of a stock dividend is to

b. increase the number of shares outstanding

Modigliani and Miller show that the value of a firm is ____ capital structure given perfect capital markets and no corporate income taxes.

b. independent of

In considering the arbitrage process in perfect capital markets with no income taxes, the market value of a firm is _________________.

b. independent of its capital structure.

A foreign subsidiary with good access to capital within the host country, tends to pay ____ dividends to the parent than subsidiaries with poor access to local capital.

b. larger

The less a firm's business risk, the ____ the amount of ____ that will be used in the optimal capital structure, holding constant all other relevant factors.

b. more; financial leverage

Computerized financial planning models may be classified as any of the following except:

b. optimistic

A firm that employs a constant payout ratio dividend policy pays ____.

b. out a certain percentage of each year's earnings

As part of a share repurchase program by a company, a tender offer involves the ____.

b. purchase of stock directly from its stockholders

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

b. relatively high, relatively low

The objective of capital structure management is to find the capital mix that leads to

b. shareholder wealth maximization

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ expected profitability or rate of return on the total assets of the firm.

b. small, higher

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ risk of the firm encountering financial difficulties.

b. small, higher

Which of the following factors does not directly affect the firm's level of investment in working capital?

b. the age of the firm's plant and equipment

The capital structure decision attempts to minimize ____ which maximizes the value of the firm.

b. the cost of capital

Which of the following is not a direct result of a stock dividend?

b. the market price of each outstanding share is increased

A survey of Fortune 500 firms indicate that they prefer internal financing (retained earnings) to external financing. This preference is known as ____.

b. the pecking order theory

Dividend payments from foreign subsidiaries represent

b. the primary means of transferring funds to the parent company

Fluctuating current assets are those assets that are affected by:

b. the seasonal nature of the company

The tax deductibility of the interest payments on corporate debt is known as:

b. the tax shield

Under the Revenue Reconciliation Act of 1993, the tax-paying individual investor may prefer low dividends and higher expected capital gains because ____.

b. the taxes on capital gains can be deferred

Two prominent finance researchers (Modigliani and Miller) showed that

b. the value of the firm is independent of its capital structure in perfect capital markets with no income taxes

All of the following factors influence a firm's business risk except:

b. variability of interest rates

Efficient current assets management refers to the firm's ability to economize on which of the following? I. Inventory II. Marketable securities

c. Both I and II

In considering factoring accounts receivable, which of the following statements is/are correct? I. Maturity factoring occurs when the firm receives payment at the normal collection or due date of the factored accounts. II. Advance factoring occurs when the firm receives payment in prior to the normal collection or due date of the factored accounts.

c. Both I and II

Which of the following influences the value of the firm? I. Investment decisions II. Dividend decisions

c. Both I and II

In examining the term structure of interest rates, the interest rates of ______________ have exceeded short-term rates.

c. Corporate bonds

What is optimal capital structure? a

c. It is the mix of debt, preferred stock and common equity that minimizes the weighted cost of the firm's employed capital.

In recent years ___________________ has been a major source of equity financing for private industry.

c. Retention of earnings

Many ____ contain provisions requiring firms to maintain a minimum net working capital provision.

c. a and b

The capital impairment restriction, a legal constraint on dividend payments, states that

c. a firm's permanent capital cannot be used to make dividend payments

All of the following are advantages of share repurchase as a dividend decision EXCEPT:

c. all current shareholders are able to sell their shares at a higher price

Perfect capital markets imply the following:

c. all investors can borrow and lend at the same rate

The process of simultaneously buying and selling the same or equivalent securities in different markets to take advantage of price differences and make a profit is called:

c. arbitrage

The Modigliani-Miller theory that the value of the firm is independent of its capital structure is based on a(n) ____ process.

c. arbitraging

The optimal capital structure of a firm is a function of the ____.

c. business risk of the firm and the tax structure

Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT:

c. buy treasury shares

All of the following are alternative dividend policies EXCEPT:

c. constant earnings

Due to both financial distress and agency costs, a firm should have a capital structure that

c. contains both debt and equity

The firm's inventory conversion period (measured in days) is equal to its average inventory divided by its ____.

c. cost of sales/365

According to the "pecking order theory," firms prefer to issue ____ securities first and then issue ____ securities as a last resort.

c. debt, equity

In the theoretical world of Miller and Modigliani

c. dividends are important only for their informational content

The use of fixed-cost financing sources is referred to as the use of

c. financial leverage

The increased variability in earnings per share due to the firm's use of debt is a definition of ____.

c. financial risk

A firm with highly liquid assets plus unused debt capacity is said to have ____.

c. financial slack

Which of the following working capital financing policies subjects the firm to the greatest risk?

c. financing permanent current assets with short-term debt

The ____ assets are those that are affected by the seasonal or cyclical nature of company sales.

c. fluctuating current

Generally the ____ a firm's business risk, the ____ the amount of financial leverage that will be used in the optimal capital structure.

c. greater, less

The airline industry is extremely price competitive, as well as having huge fixed costs and very low variable costs. This is an example of:

c. high operating leverage

A firm accepts the risk of fixed-cost financing is to:

c. increase possible returns to stockholders.

If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the ____ approach to asset financing.

c. matching

The optimal level of working capital investment is the level that is expected to

c. maximize shareholder wealth

In determining the capital structure for an international firm, the managerial objective is to

c. minimize the overall cost of capital

One of the primary assumptions of capital structure analysis is that the level and variability of ____ is not expected to change as changes in capital structure are contemplated.

c. operating income

The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capital to the firm is known as the

c. optimal capital structure

According to the ____ dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders.

c. passive residual

A passive residual dividend policy suggests that the firm will:

c. pay a dividend only after all viable investment projects have been exhausted

A firm's cash conversion cycle is equal to its operating cycle minus its ____.

c. payables deferral period

The market value of a levered firm can be represented by the following equation: Market value of levered firm = Market value of unlevered firm ____ Present value of tax shield ____ Present value of financial distress costs ____ Present value of agency costs

c. plus; minus; minus

Studies of capital structure changes have found that actions that increase leverage have generally been associated with ____ stock returns and actions that decrease leverage are associated with ____ stock returns.

c. positive, negative

All of the following are arguments for the relevance of dividends except:

c. protection against dilution

The operating cycle begins with the ____ and ends with the ____.

c. purchases of resources, receipt of cash

From an accounting standpoint, stock splits are accomplished by

c. reducing the par value of existing shares

A firm's net working capital position is a widely used measure of its ____.

c. risk

Commercial paper is:

c. short-term with maturities that do not exceed nine months.

The tax deductibility of interest payments provides the firm with a:

c. tax shield

Most states limit dividend policy by requiring

c. that dividends may not be paid when the firm is insolvent

The record date in the normal dividend payment procedure is

c. the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend

When factoring accounts receivables, the factor is the:

c. the financial institution that buys the accounts receivable.

One reason why small business concerns have very low dividend payout ratios is that

c. the firm needs the funds to finance growth

Negotiated short-term credit sources are all of the following EXCEPT:

c. trade credit

Historically, the yield curve has generally been ____, which indicates that long-term interest rates usually have been ____ short-term interest rates.

c. upward sloping, higher than

Under dividend reinvestment plans, shareholders can automatically

c. use dividends to purchase additional shares

A firm's working capital position is important from an internal and external standpoint. Which of the following apply:

d. A working capital position determines its level of common stock sales.

Several regulations limit dividend payments. All of the following limit dividend payments except:

d. Liability restriction

When pledging accounts receivables, which of the following statements is/are correct? I. Pledging requires permission of the SEC. II. In pledging accounts receivables, the firm loses title to the receivables and they are no longer listed on the balance sheet.

d. Neither I nor II

Borrowers (e.g., business firms) feel that there is more risk associated with short-term debt (as compared with long-term debt) because of the

d. a and b

With the matching approach to meeting the financing needs of the firm, fixed and permanent current assets are financed with

d. a and c

An anticipated need for short-term borrowed funds is best shown in

d. a cash budget

The length of the operating cycle for a firm is equal to the length of the

d. a plus b

The length of the operating cycle is equal to the length of the

d. a plus b

Restrictive covenants are contained in all of the following except

d. agency restrictions

Many firms try to maintain a stable dividend policy

d. all of the above

The following factors influence a firm's ability and/or willingness to pay dividends:

d. all of the above

Which of the following factors affect the firm's level of investment in working capital?

d. all of the above

Protection for debt holders takes the form of protective covenants in the bond indenture. These covenants place restrictions on which of the following activities?

d. all of the above are typical protective covenants

Dividend policy can affect the value of the firm for which of the following reasons?

d. all of these answers are correct

If a firm shows a profit on the quarterly income statement, then

d. all the above may be correct

Operating leverage involves the use of

d. assets having fixed costs

Dividend reinvestment plans involve the purchase of

d. both newly issued and existing stock

The optimal capital structure is a function of ____.

d. corporate income taxes, financial distress costs, and agency costs

In considering a firm's capital structure, the firm should increase its ____ which will maximize its value.

d. debt

Rank in chronological sequence the payment date, ex-dividend date, declaration date, and record date.

d. declaration date, ex-dividend date, record date, payment date

The fundamental question in dividend policy is

d. determining what portion of earnings will be paid out

The theoretical post-stock dividend price is equal to the pre-stock dividend price ____.

d. divided by 1 plus the percentage stock dividend rate

In analyzing the value of the firm as a function of capital structure, the present value of the tax shield benefit is offset by the present value of the expected ____, resulting in an interior optimal capital structure.

d. financial distress costs and agency costs

In order for a stock to qualify for inclusion on the "legal lists," a firm must

d. have a record of continuous and stable dividends

Which phrase below best summarizes the arguments supporting a stable dollar dividend policy?

d. informational content

As more debt is added to the capital structure of a firm, the cost of debt capital

d. initially rises slowly, then increases rapidly beyond some point

Under a conservative approach to working capital management, a firm tends to hold a relatively ____ proportion of its total assets in the form of current assets.

d. large

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to result in ____ expected after-tax earnings for the firm.

d. large, higher

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to ____ the variability (or risk) of the after-tax earnings of the firm.

d. large, increase

The ____ is the optimal working capital investment and financing policy.

d. none of the above

Which of the following assets (if any) are not part of a firm's working capital investment?

d. none of the above

Factoring accounts receivable is done:

d. on a non-recourse basis

The value of a firm is influenced by three types of financial decisions including all of the following EXCEPT:

d. par value decisions

Agency costs

d. reduce the market value of the levered firm

Arbitrage transactions are:

d. risk-free

A dividend method that many tech companies favor in order to have more tax efficiency, boost earnings per share and signal that the company has more productive uses for its cash than paying dividends is:

d. stock buybacks

The size of a firm's investment in current assets is a function of all of the following factors except

d. stockholders equity

All of the following are dividend policies EXCEPT:

d. stockholders who prefer a high dividend payout are unwilling to pay extra for the stock of companies that provide a higher yield mostly because they are living on a fixed income.

The managerial implications of capital structure theory include all of the following except:

d. tax shield benefits from equity lead to increased firm value