Conceptual Questions on Info After Test 2 Finance

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" b. "informational content" c. signal d. passive residual theory

A. "clientele effect"

Under Chapter(s) ____ of the bankruptcy laws, a company continues to operate while it attempts to work out a reorganization plan. a. 11 b. 7 c. 4 d. 4 and 11

A. 11

61. Which of the following about an asset purchase merger transaction is/are correct? I. Only the assets are purchased. II. The buying firm receives 100% of the assets and incurs only 50% of the liabilities. a. I only b. II only c. Both I and II d. Neither I nor II

A. I only

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 b. II only c. Both I and II d. Neither I nor II

A. I only

Which of the following is/are a feature of convertible securities? I. Conversion price II. Conversion stock a. I only b. II only c. Both I and II d. Neither I nor II

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 b. II only c. Both I and II d. Neither I nor II

A. I only

Which of the following is not a common feature of financing with warrants? a. an exercise price that is below the market price of common stock at the time the warrant is issued b. typical life of a warrant is between 5 and 10 years c. warrant is usually detachable from a debenture or preferred stock d. if a warrant is issued as part of a "unit,"it is usually detachable from a debenture or preferred stock

A. an exercise price that is below the market price of common stock at the time the warrant is issued

The process of liquidating a business outside of the jurisdiction of the bankruptcy courts is called a(n) a. assignment b. composition c. extension d. voluntary insolvency

A. assignment

The contract period of an operating lease tends to a. be somewhat less than the economic life of an asset b. be equal to the economic life of the asset c. be somewhat greater than the economic life of the asset d. recover the full cost of the asset

A. be somewhat less than the economic life of an asset

All of the following are anti-takeover measures except: a. black knight b. staggered board c. super major voting rules d. golden parachute

A. black knight

All of the following are reasons why companies issue convertible securities except: a. cheaper total cost than nonconvertible securities b. lower interest payments than nonconvertible securities c. sell common stock at a price above current market price d. deferred issuance of common stock

A. cheaper total cost than nonconvertible securities

A combination of two or more companies in which neither competes directly with the other and no buyer-seller relationship exists is known as a a. conglomerate merger b. vertical merger c. horizontal merger d. takeover

A. conglomerate merger

A ____ is a fixed income security with a call option on common stock. a. convertible security b. warrant c. futures contract d. derivative security

A. convertible security

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. b. dividends should be paid only when the firm has ready access to new equity markets c. retained earnings, being the residual earnings of the firm, should always be paid out to existing stockholders d. investment policy and dividend policy decisions should always be made independently

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

The most basic type of interest rate swap is the: a. fixed for floating rate swap b. exchange-rated swap c. LIBOR for prime rate swap d. Interest rate rights offering

A. fixed for floating rate swap

When a company issues convertible securities, its usual intention is: a. future issuance of common stock b. future reduction of outstanding common stock c. future issuance of non-convertible debt and preferred stock d. future issuance of preferred stock

A. future issuance of common stock

All of the following are advantages of leasing except a. generally lower cost than ownership b. leasing smoothes out expenses c. leasing may increase a firm's liquidity d. it provides 100% financing

A. generally lower cost than ownership

The basic methods used in combining financial accounts in a merger include all of the following except the a. goodwill consolidation method b. purchase method c. pooling of interests method d. book value method

A. goodwill consolidation method

The ____ the expected stock price volatility, the ____ the value of the call option. a. greater, higher b. lower, higher c. greater, lower d. lower, lower

A. greater, higher

13. 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 b. cash flow needs c. informational content of dividends d. investment opportunities

A. individual shareholder preferences

In calculating fully diluted earnings per share, earnings must be adjusted for: a. interest saved. b. the number of convertible securities in the marketplace. c. the number of executive bonus packages that could impact the firm's earnings. d. the company's credit rating

A. interest saved

According to Miller and Modigliani, it is ____ that really determines a firm's value. a. investment policy b. dividend policy c. payout ratio d. transaction costs

A. investment policy

A form of business combination in which two (unaffiliated) companies contribute financial and/or physical assets, as well as personnel, to a new company to engage in some economic activity is known as a ____. a. joint venture b. conglomerate merger c. merger d. consolidation

A. joint venture

Disadvantages of leasing include all of the following except a. leasing usually decreases a firm's liquidity b. leasing is often more expensive than purchasing c. loss of the asset's salvage value d. lessee may have difficulty getting approval to make property improvements on leased real estate

A. leasing usually decreases a firm's liquidity

Legal bankruptcy proceedings focus on the decision of whether or not the firm's value as a going concern is greater than its a. liquidation value b. market value c. equity value d. historical value

A. liquidation value

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 b. net operating earnings c. initial investment d. earned capital

A. net earnings

The preemptive right allows shareholders the a. opportunity to maintain their original ownership percentage b. right to purchase shares in the secondary markets c. right to vote for members of the board of directors d. all of these answers are correct

A. opportunity to maintain their original ownership percentage

An example of a passive institutional investor is a: a. pension fund b. private equity investor c. parent company d. third party administrator

A. pension fund

In the ____ method of accounting for mergers, the total value paid or exchanged for the acquired firm's assets is recorded on the acquiring company's books. a. purchase b. goodwill c. pooling of interests d. stockholder's equity

A. purchase

On the ex-dividend date, the a. seller of the stock is entitled to the dividend b. buyer has 4 business days to register his/her purchase c. buyer of the stock is entitled to the dividend d. corporation records all security owners

A. seller of the stock is entitled to the dividend

In a(n) ____ common stock in a division or subsidiary is distributed to shareholders of the parent company on a pro rata basis. a. spin-off b. reverse LBO c. equity carve-out d. tender offer

A. spin-off

Technical insolvency occurs when a. the firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its liabilities b. the recorded value of the firm's assets is less than the recorded value of its liabilities c. the firm files a bankruptcy petition in accordance with the Federal bankruptcy laws d. the owners of the businesses lack experience

A. the firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its liabilities

The conversion ratio of a convertible security is: a. the number of shares that can be obtained b. the value of the shares obtained c. the price at which the security is exchangeable d. the loss in the security's value once it is exchanged.

A. the number of shares that can be obtained

A firm is technically insolvent when: it is unable to meet it current obligations and: a. the value of its assets exceeds the value of its liabilities. b. the value of its assets is less than the value of its liabilities. c. it files a bankruptcy petition. d. it merges with another firm.

A. the value of its assets exceed the value of its liabilities

A stock dividend will not affect which of the following balance sheet items. a. total assets b. retained earnings c. contributed capital in excess of par d. common stock at par

A. total assets

When a firm purchases its own stock in the open market, the repurchased shares become known as ____. a. treasury stock b. preferred stock c. option stock d. reinvestment stock

A. treasury stock

In the net advantage to leasing calculation, after-tax salvage value is discounted at the firm's a. weighted (marginal) cost of capital b. cost if internal equity capital c. cost of external equity capital d. after-tax marginal cost of borrowing

A. weighted (marginal) cost of capital

Which of the following is not a direct result of a stock dividend? a. the number of shares outstanding is increased b. the market price of each outstanding share is increased c. the amounts shown in the firm's capital accounts are redistributed d. the per-share price of the stock goes up

B

Leasing accounts for more than ____ percent of all business investment in equipment. a. 10 b. 25 c. 50

B. 25

Under Chapter(s) ____ of the bankruptcy laws, a company's assets are sold off and the proceeds are distributed to the creditors. a. 11 b. 7 c. 4 d. 7 and 11

B. 7

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following? I. stock shares will decrease II. earnings per share will decrease. a. I only b. II only c. Both I and II d. Nether I nor II

B. II only

The dividend clientele effect concept was originally developed by a. Myron Gordon b. Merton Miller and Franco Modigliani c. Milton Friedman

B. Merton Miller and Franco Modigliani

An anti-takeover measure that is inserted in the corporate charter stating that 80% of the stock shares must approve the takeover proposal is a(n): a. Golden parachute b. Supermajority voting rules c. Poison puts d. Standstill agreement

B. Supermajority voting rules

All of the following are first determined by the lessee before a direct lease EXCEPT: a. Equipment that will be leased b. What taxes will be paid based on the lease c. Options, warranties service agreements that will have to be made d. What price will be paid for the asset

B. What taxes will be paid based on the lease

When a firm initiates the repurchase of stock through a tender offer, it is giving the shareholders: a. treasury stock notification b. a put option c. a call option d. a futures option

B. a put option

The passive residual dividend policy seems to be inconsistent with a. a world having significant transactions costs associated with new stock issues b. a stable dividend policy c. a policy of paying only stock dividends d. a share-repurchase policy

B. a stable dividend policy

Lease-buy analysis assumes that the alternative to leasing as the source of financing is a. buying for cash b. borrowing to buy c. buying with all equity funds d. buying with before-tax dollars

B. borrowing to buy

Conversion of a convertible security may be forced by the issuing company by a. raising the interest rate b. calling the securities for redemption c. lowering the dividend on common stock d. none of these are methods of forcing conversion

B. calling the securities for redemption

A(n) ____ is a situation in which a failing business is permitted to discharge its debt obligations by paying less than the full amounts owed to creditors. a. assignment b. composition c. extension d. insolvency

B. composition

An option has a ____ claim. a. fixed b. contingent c. subordinated claim d. superior claim

B. contingent

A ____ is a fixed-income security issued by a company with a call option on its common stock. a. warrant b. convertible debenture c. lease d. extendible noteq

B. convertible debenture

The most correct method of valuing a merger candidate is: a. adjusted book value method b. discounted cash flow method c. pooling of interests method d. comparative price-earnings ratio method

B. discounted cash flow method

_________________ determines the ultimate distribution of the firm's earnings between reinvestment and cash dividend payment to shareholders. a. Board of Directors' agreements b. Dividend policy c. Financial expertise d. Management efficiency

B. dividend policy

6. Finance researcher Myron Gordon argues that a. risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline b. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value c. the clientele effect has no influence on share value d. the existence of transaction costs has no impact on the dividend decision

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

The ____ is the number of acquiring company shares received per share of acquiring company stock owned. a. stock equity ratio b. exchange ratio c. dividend exchange ratio d. interest parity ratio

B. exchange ratio

Dividend payments reduce all of the following balance sheet items except a. cash b. fixed assets c. stockholder's equity d. retained earnings

B. fixed assets

A firm with stable earnings is usually more willing to a. retain more earnings b. have a higher dividend payout ratio c. have a sinking fund agreement d. seek aggressive growth

B. have a higher dividend payout ratio

All other things being equal, the ____ the exercise price, given the stock price, the ____ is the call option value. a. higher, higher b. higher, lower c. lower, lower d. lower, higher

B. higher, lower

Firms with the ____ earnings growth tend to have the ____ dividend payout ratio. a. highest, highest b. highest, lowest c. lowest, lowest d. lowest, highest

B. highest, lowest

In a ____ form of business combination, a parent-subsidiary relationship exists between the acquiring and acquired companies. a. leveraged buyout b. holding company c. consolidation d. leveraged buyout or consolidation

B. holding company

The net effect of a stock dividend is to a. increase the firm's total stockholders' equity b. increase the number of shares outstanding c. increase total dividends d. increase stock prices

B. increase the number of shares outstanding

All of the following are reasons why firms issue warrants except: a. lowers agency costs b. increases leverage at time of issue c. permits a company to sell common stock at a price above the price prevailing at the time of warrant issue d. allows a firm to sell common stock in the future without incurring underwriting costs at the time of sale

B. increases leverages at time of issue

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. a. smaller b. larger c. no d. none of these answers is correct; dividends are not related to availability of capital

B. larger

Employee Stock Ownership Plans (ESOPs) are useful instruments for financing leveraged buyouts because in an ESOP transaction a. employees have a greater voice in the final decision b. lenders can offer below market interest rates c. ESOPs can be used only when employees take over management functions d. ESOPs attract greater external equity investments

B. lenders can offer below market interest rates

In a lease arrangement, the owner of the property is called the a. lessee b. lessor c. equity trustee d. lender

B. lessor

The acquisition of a company in which the buyer borrows a large amount of the purchase price, using the purchased assets as collateral for a large portion of the borrowings, is known as a ____. a. pooling of interests b. leveraged buyout c. conglomerate merger d. tender offer

B. leveraged buyout

Normally, when a firm operates under the protection of a bankruptcy court, lease payments ____. a. may be suspended b. must continue to be paid by lessors c. must be paid to lessors if assets are secured d. may be suspended if they are "true" leases

B. must continue to be paid by lessors

A firm that employs a constant payout ratio dividend policy pays ____. a. a constant (fixed) dollar dividend b. out a certain percentage of each year's earnings c. a constant quarterly dividend d. low payout ratios if the company has low growth rates

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

The accounting method used in most mergers is the ____ method. a. pooling of interests b. purchase c. consolidation d. merger

B. pufchase

As part of a share repurchase program by a company, a tender offer involves the ____. a. purchase of stock on the open market b. purchase of stock directly from its stockholders c. private negotiation of purchases from large institutions, such as insurance companies d. planning for many positive-NPV investments

B. purchase of stock directly from its stockholders

Bonds may have a ____ which gives the holder of the bond the right to sell it back to the issuer under certain conditions. a. warrant b. put option c. rights offering d. call option

B. put option

When the net income of the combined companies after merger exceeds the sum of the net incomes prior to the merger, ____ is said to exist. a. goodwill b. synergy c. leverage d. greenmail

B. synergy

In a ____, the acquiring company effectively announces that it will pay a certain price above the current existing price for a merger candidate's shares. a. leveraged buyout b. tender offer c. equity carve-out d. divestiture

B. tender offer

Conversion price is: a. the number of common stock shares owned after the conversion. b. the effective price of the common stock per share obtained by converting. c. the market price of the common stock per share. d. the difference between the market price of the common stock and the exercise price of the stock.

B. the effective price of the common stock per share obtained by converting.

The sale and leaseback is advantageous to the lessee because a. the lessee cannot continue using the asset b. the lessee receives cash from the sale of the asset c. the lessee receives title to property at the termination of the lease d. the lessee is never required to pay taxes and insurance

B. the lessee receives cash from the sale of the asset

Dividend payments from foreign subsidiaries represent a. a movement from a weak to a stronger currency b. the primary means of transferring funds to the parent company c. a way to avoid taxes d. the effects of exchange risk

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

Legal insolvency occurs when a. the firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its liabilities b. the recorded value of the firm's assets is less than the recorded value of its liabilities c. the firm files a bankruptcy petition in accordance with the Federal bankruptcy laws d. the owners of the businesses lack experience

B. the recorded value of the firm's assets is less than the recorded value of its liabilities

Under the Revenue Reconciliation Act of 1993, the tax-paying individual investor may prefer low dividends and higher expected capital gains because ____. a. the top marginal rate is lower on dividend income than on capital gains b. the taxes on capital gains can be deferred c. capital gains are more certain than share repurchases d. the tax on capital gains is 28%

B. the taxes on capital gains can be deferred

A combination of two or more companies that have a buyer-seller relationship with each other is known as a a. conglomerate merger b. vertical merger c. horizontal merger d. takeover

B. vertical merger

A(n) ____ is a call option issued by a company on its securities, usually common stock. a. debenture b. warrant c. futures contract d. extendible note

B. warrant

An operating lease is often referred to as: I. service lease II. maintenance lease a. I only b. II only c. Both I and II d. Neither I nor II

C. Both I and II

Conversion premium is the amount by which the market value of a convertible security is higher than: I. the conversion value of the security II. the combined interest or dividend payments of the security a. I only b. II only c. Both I and II d. Neither I nor II

C. Both I and II

Which of the following influences the value of the firm? I. Investment decisions II. Dividend decisions a. I only b. II only c. Both I and II d. Neither I nor II

C. Both I and II

Which of the following would be considered a reason for corporate restructuring? I. Availability of credit II. Low cost of credit a. I only b. II only c. Both I and II d. Neither I nor II

C. Both I and II

In recent years ___________________ has been a major source of equity financing for private industry. a. DRIPs b. Common stock sales c. Retention of earnings d. Preferred stock sales

C. Retention of earnings

The capital impairment restriction, a legal constraint on dividend payments, states that a. only the current year's earnings may be used for dividend payments b. dividends may not be paid out of stockholder's equity c. a firm's permanent capital cannot be used to make dividend payments d. a firm's capital surplus can be used to make dividend payments

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

Which of the following leases is not likely to be viewed as a lease from the perspective of the Internal Revenue Service? a. a 20 year lease for an asset having an economic life estimated to be 40 years b. a lease offering a renewal option based on the asset's remaining value at the time of the renewal c. a lease providing for a purchase option at the end of the lease period for a nominal sum d. a leveraged lease in which the lessor contributes 40 percent equity

C. a lease providing for a purchase option at the end of the least period for a nominal sum

The conversion ratio of a convertible security may change when a. a cash dividend is paid b. there is a change in the market value of the security c. a stock dividend is paid d. there is a rights offering

C. a stock dividend is paid

All of the following are advantages of share repurchase as a dividend decision EXCEPT: a. effectively converts dividend income into capital gains income b. provide firm with greater financial flexibility in timing the payment of returns to shareholders. c. all current shareholders are able to sell their shares at a higher price d. they represent a signal to investors that the company expects higher earnings in the future

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

In comparing warrants and rights, they: a. are similar in that the company can discriminate as to who buys new company stock. b. are similar in that they allow the purchase of existing stock only c. are different in that both allow the firm to receive additional funds at the time they are exercised. d. are different in that rights allow the holder of the right to vote in corporate elections based on the number of shares the right can purchase.

C. are different in that both allow the firm to receive additional funds at the time they are exercised.

The similarities between convertible securities and warrants include all of the following except: a. both tend to reduce agency costs b. the purpose of both is the deferred issuance of common stock c. both give the company full control over when the common stock is issued d. all of these answers are correct

C. both give the company full control over when the common stock is issued

Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT: a. buy from shareholders through a tender offer b. buy outstanding shares in the open market c. buy treasury shares d. negotiate a purchase privately from large holders, particularly institutions

C. buy treasury shares

A combination in which all of the combining companies are dissolved and a new firm is formed is known as a ____. a. holding company b. leveraged buyout c. consolidation d. composition

C. consolidation

All of the following are alternative dividend policies EXCEPT: a. constant payout b. stable dollar c. constant earnings d. passive residual

C. constant earnings

A security whose payoffs (returns) depend on the value of another security is known as a(n) ____. a. interest rate swap b. master limited partnership c. contingent claim d. extendible note

C. contingent claim

The difference between the market value of a convertible bond and the higher of its conversion or straight-bond value is the a. exercise premium b. investment premium c. conversion premium d. liquidation premium

C. conversion premium

The conversion value (i.e., stock value) of a convertible bond is defined as the ____ times the ____. a. conversion ratio, conversion price b. conversion premium, exercise price c. conversion ratio, common stock market price d. conversion ratio, exercise price

C. conversion ratio, common stock market price

One reason for a company to spin-off a division is to: a. consolidate expenses. b. remove an underperforming unit. c. create a better distribution unit. d. achieve synergy.

C. create a better distribution unit

In the theoretical world of Miller and Modigliani a. a firm should pay out 100 percent of earnings as dividends to maximize shareholder wealth b. the marginal tax rates facing investors are the most important single determinant of dividend policy c. dividends are important only for their informational content d. dividends reduce investors' uncertainty

C. dividends are important only for their informational content

A(n) ____ is a situation in which a failing business is permitted to lengthen the amount of time it has to meet its obligations with creditors. a. assignment b. composition c. extension d. insolvency

C. extension

____ earnings per share are calculated based on the assumption that all dilutive securities are converted into common shares. a. Primary b. Full primary c. Fully diluted d. First class

C. fully diluted

Leasing offers a number of potential advantages. All of the following are advantages except a. flexibility b. effective depreciation of land c. generally lower costs d. may be the only source of financing available to the marginally profitable firm

C. generally lower costs

____ equals the capitalized value of the company's operating earnings minus its liabilities. a. Market value b. Equity value c. Going-concern value d. Liquidation value

C. going-concern value

Prior to a warrant's expiration, its market price will be ____ the formula value a. equal to b. less than c. greater than d. negative as compared to

C. greater than

In general, the market price of a "right" is ____ than the theoretical value and this difference in values ____ as the right's expiration date approaches. a. less, decreases b. less, increases c. greater, decreases d. greater, increases

C. greater, decreases

In general, the greatest economies of scale are possible with ____ mergers. a. conglomerate b. vertical c. horizontal d. integrated

C. horizontal

A combination of two or more companies that compete directly with each other is known as a a. conglomerate merger b. vertical merger c. horizontal merger d. takeover

C. horizontal merger

A type of financial derivative that would allow a firm to hedge against changes in interest rates over a 5-year period is a ____. a. interest rate futures contract b. commodity soup c. interest rate swap d. interest rate put option

C. interest rate swap

A sale and leaseback agreement a. is usually an operating lease b. is rarely used in today's leasing agreements c. is a method of providing liquidity for the lessee d. frequently is used for machinery financing, but rarely used in real estate

C. is a method of providing liquidity for the lessee

In a(n) ____, the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment. a. operating lease b. capital lease c. leveraged lease d. term lease

C. leveraged lease

The type of lease that is a three-sided agreement among the lessee, the lessor and the lenders is: a. Leaseback agreement b. Direct lease c. Leveraged lease d. Operating lease

C. leveraged lease

A primary difference between leveraged leases and other financial leases is that a. leveraged leases must be capitalized and shown on the lessee's balance sheet b. the lessor in a leveraged lease is invariably the manufacturer of the leased asset c. leveraged leases involve the use of non-recourse debt d. unleveraged leases are usually tax motivated

C. leveraged leases involve the use of non-recourse debt

The ____ the time remaining before an option expires, the ____ the option value. a. longer, lower b. shorter, higher c. longer, higher d. shorter, lower

C. longer, higher

Lessees with ____ are most likely to use leveraged leases for large transactions. a. low profit levels b. large amounts of tax exempt income c. low profits and high amounts of tax-exempt income d. outlays of less than $300,000

C. low profits and high amounts of tax-exempt income

All of the following have been cited as advantages of leasing by small businesses except: a. less cash required up front b. fewer restrictive covenants from lessor than lenders c. lower effective interest costs relative to borrowing d. quicker approvals from lessors than from lenders

C. lower effective interest costs relative to borrowing

The value of the right can be calculated under one of the following circumstances. a. using the Gordon model b. trading ex-rights c. market order d. based on a margin account

C. market order

A capital lease is considered a(n) _________________________agreement. a. negotiable b. cancelable c. noncancelable d. short-term

C. noncancelable

One anti-takeover measure is the ____, where the target company makes a takeover bid for the stock of the bidder. a. poison put b. black knight defense c. pacman defense d. shark repellent

C. pacman defense

According to the ____ dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders. a. constant payout ratio b. stable dollar c. passive residual d. reinvestment

C. passive residual

A passive residual dividend policy suggests that the firm will: a. pay the same dollar amount of dividends every year b. pay the same percentage of earnings in dividends every year c. pay a dividend only after all viable investment projects have been exhausted d. omit a dividend in the next period

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

A bond that contains a put option that can be exercised only if an unfriendly takeover occurs, is an example of a ____ . a. pacman defense b. liability restructuring c. poison pill d. standstill option

C. poison pill

14. In the ____ method of combining financial accounts in a merger, the acquired company's assets are recorded on the acquiring company's books at their cost (net of depreciation) when originally acquired. a. goodwill consolidation b. purchase c. pooling of interests d. EVA

C. pooling of interests

All of the following are arguments for the relevance of dividends except: a. existence of issuance costs b. reduction of agency costs c. protection against dilution d. risk aversion

C. protection against dilution

In the ____ method for combining financial accounts in a merger, the total value paid or exchanged for the acquired company's assets is recorded on the acquiring company's books. a. pooling of interests b. goodwill consolidation c. purchase d. book value

C. purchase

From an accounting standpoint, stock splits are accomplished by a. increasing the number of shares authorized b. increasing par value of existing shares c. reducing the par value of existing shares d. reducing the number of shares, and increasing the price of each share

C. reducing the par value of existing shares

When the market value of a company's common stock is below the replacement value of the firm's net assets, this company is frequently referred to as a possible ____. a. white knight b. leveraged buyout c. takeover candidate d. conglomerate

C. takeover candidate

Most states limit dividend policy by requiring a. that dividends may not be paid unless the firm generates net earnings during the most recent year b. that dividends may only be paid out of retained earnings c. that dividends may not be paid when the firm is insolvent d. the firm's capital to be used to pay dividends

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

The record date in the normal dividend payment procedure is a. the same day as the declaration date b. the same day as the ex-dividend date c. the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend d. one day prior to the payment date

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

One reason why small business concerns have very low dividend payout ratios is that a. the firm usually is low on cash b. the firm needs funds for taxes c. the firm needs the funds to finance growth d. the small firm prefers stock offerings

C. the firm needs the funds to finance growth

In a direct lease, the user-lessee first determines all of the following EXCEPT: a. which manufacturer will supply the equipment b. what equipment will be leased c. the terms of the lease d. what price will be paid for the asset

C. the terms of the lease

Under dividend reinvestment plans, shareholders can automatically a. reduce their taxable income b. increase their cash inflows c. use dividends to purchase additional shares d. transfer from retained earnings accounts to equity accounts.

C. use dividends to purchase additional shares

An antitakeover measure that is employed after the takeover has been initiated is: a. Golden parachute b. Staggered board c. White knight d. Poison put

C. white knight

All of the following are disadvantages of leasing except a. difficulty in making property improvements b. financial leases are non-cancelable c. normally higher maintenance charges d. generally higher cost than ownership

C.normally higher maintenance charges

Which phrase below best summarizes the arguments supporting a stable dollar dividend policy? a. earnings stability b. beta c. capital structure d. informational content

D.

A reorganization plan is reviewed by the ____ for fairness and feasibility. a. bankruptcy court b. Securities and Exchange Commission c. Federal Trade Commission d. bankruptcy court and the SEC

D. Bankruptcy court and the SEC

Several regulations limit dividend payments. All of the following limit dividend payments except: a. Capital impairment restriction b. Restrictive covenants c. Net earnings restriction d. Liability restriction

D. Liability restriction

Conversion of a convertible security can occur in two ways. Which of the following is/are correct? I. It can be a voluntary conversion at specific times prior to the expiration date. II. It can be a forced conversion at any time prior to the expiration date. a. I only b. II only c. Both I and II d. Neither I nor II

D. Neither I nor II

Firms issue warrants for which of the following reasons? I. Allows the company to sell stock at a price above what other company stock is selling for. II. Allows the company to choose which investors are allowed to buy the company's stock. a. I only b. II only c. Both I and II d. Neither I nor II

D. Neither I nor II

In considering the advantages of leasing, which of the statements is/are correct? a. Leasing provides approximately 50% of the necessary financing. b. Leasing can decrease the firm's liquidity. c. Both a and b are correct. d. Neither a nor b is correct.

D. Neither a nor b is correct

A plan of reorganization must be all of the following EXCEPT: a. feasible b. fair c. a plan that allows the firm a chance to reestablish successful business operations d. a plan whereby the creditors that are due the most money are paid first.

D. a plan whereby the creditors that are due the most money are paid first

In the net advantage to leasing calculation, all cash flows (except salvage value) are discounted at the firm's a. weighted (marginal) cost of capital b. cost of internal equity capital c. pretax marginal cost of borrowing d. after-tax marginal cost of borrowing

D. after-tax marginal cost of borrowing

Restrictive covenants are contained in all of the following except a. preferred stock agreements b. lease contracts c. bond indentures d. agency restrictions

D. agency restrictions

All of the following are true of financial leases except a. non-cancelable b. lessee is normally responsible for maintenance and insurance c. lease payments are normally sufficient to amortize the original cost of the asset d. all financial leases are also leveraged leases

D. all financial leases are also leveraged leases

Many firms try to maintain a stable dividend policy a. because of the informational content of dividend changes b. in order to satisfy investors who rely on dividends as a primary source of income c. in order to remain as eligible investments for many financial institutions d. all of the above

D. all of the above

The following factors influence a firm's ability and/or willingness to pay dividends: a. liquidity b. borrowing capacity and access to capital markets c. earnings stability d. all of the above

D. all of the above

Dividend policy can affect the value of the firm for which of the following reasons? a. personal taxes b. flotation costs c. shareholder transaction costs d. all of these answers are correct

D. all of these answers are correct

Which of the following (if any) are factors affecting the value of a call option? a. time remaining until expiration date b. interest rates c. expected stock price volatility d. all of these factors affect the value of a call option

D. all of these factors affect the value of a call option

As a financing device, warrants have been used in connection with a. bond swaps b. equity offerings c. debt restructurings and bond swaps d. bond swaps, equity offerings, and debt restructurings

D. bond swaps, equity offerings, and debt restructurings

Dividend reinvestment plans involve the purchase of a. newly issued stock b. existing stock c. letter stock d. both newly issued and existing stock

D. both newly issued and existing stock

The major methods typically used to value merger candidates include all the following except a. comparative price-earnings ratio method b. adjusted book value method c. discounted cash flow method d. bottom line comparison method

D. bottom line comparison method

A firm that issues warrants a. can expect to receive additional funds if the formula value of the warrant is zero at the expiration date b. has to pay the same per share dividend to the warrant holders as it pays to its stockholders c. cannot issue convertible securities while the warrants are outstanding d. can expect to receive additional funds if the formula value of the warrant is positive at the expiration date

D. can expect to receive additional funds if the formula value of the warrant is positive at the expiration date

The price at which convertible securities are exchangeable for common stock is the a. conversion value b. par value c. put price d. conversion price

D. conversion price

____ are examples of contingent claims. a. Convertible bonds and warrants b. Warrants and extendible notes c. Options and extendible notes d. Convertible bonds, options, and warrants

D. convertible bonds, options, and warrants

Rank in chronological sequence the payment date, ex-dividend date, declaration date, and record date. a. record date, declaration date, ex-dividend date, payment date b. declaration date, record date, ex-dividend date, payment date c. declaration date, record date, payment date, ex- dividend date d. declaration date, ex-dividend date, record date, payment date

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

Which of the following terms are not associated with mergers and acquisitions? a. white knight b. tender offers c. greenmail d. declaration of bankruptcy

D. declaration of bankruptcy

The fundamental question in dividend policy is a. the tax consideration b. the amount of growth the firm considers optimal c. not violating any restrictive covenants d. determining what portion of earnings will be paid out

D. determining what portion of earnings will be paid out

The theoretical post-stock dividend price is equal to the pre-stock dividend price ____. a. multiplied by 1 minus the percentage stock dividend rate b. multiplied by 1 plus the percentage stock dividend rate c. divided by 1 minus the percentage stock dividend rate d. divided by 1 plus the percentage stock dividend rate

D. divided by 1 plus the percentage stock dividend rate

The reasons why a company may choose external growth by merger over internal growth include a. economies of scale b. more rapid growth c. tax considerations and rapid growth d. economies of scale, tax considerations, and more rapid growth

D. economies of scale, tax considerations, and more rapid growth

In analyzing a merger the ____ is the number of the acquiring company shares received per share of acquired company stock owned. a. assignment b. composition c. price-purchase ratio d. exchange ratio

D. exchange ratio

The ____ is the price that the call option buyer pays the writer of the option if the buyer decides to exercise the option. a. option premium b. option discount c. conversion price d. exercise price

D. exercise price

Which of the following securities (if any) is not an example of an option? a. warrant b. convertible security c. right d. futures contract

D. futures contract

An antitakeover measure where a company attempts to buy back its shares of stock at a premium from the company or investor who initiated the unfriendly takeover is: a. pacman defense b. boardmail c. white squire d. greenmail

D. greenmail

In order for a stock to qualify for inclusion on the "legal lists," a firm must a. register with the Securities Exchange Commission (SEC) b. have assets in excess of $500,000 c. have 10 continuous profitable quarters d. have a record of continuous and stable dividends

D. have a record of continuous and stable dividends

17. The market value of a convertible debt issue is usually above the a. conversion ratio b. conversion value c. straight-bond value d. higher of either the conversion value or the straight-bond value

D. higher one other the conversion value or the straight-bond value

What is a form of business combination in which a company purchases all or a controlling block of another company's common shares and the two companies become affiliated? a. horizontal merger b. vertical merger c. conglomerate d. holding company

D. holding company

Bankruptcy occurs when the firm a. is unable to pay its debts b. files a bankruptcy petition in accordance with the Federal bankruptcy laws c. is more than 6 months overdue to its creditors d. is unable to pay its debts and files a bankruptcy petition in accordance with the Federal bankruptcy laws

D. is unable to pay its debts and files a bankruptcy petition in accordance with the Federal bankruptcy laws

The conversion premium of a convertible bond tends to be ____ when the conversion value is ____ the straight-bond value. a. smallest, nearly equal to b. largest, less than c. largest, greater than d. largest, nearly equal to

D. largest, nearly equal to

____ equals the proceeds that would be received from the sale of the firm's assets minus its liabilities. a. Market value b. Equity value c. Going-concern value d. Liquidation value

D. liquidation value

All of the following are types of "true leases" EXCEPT: a. Operating lease b. Capital lease c. Financial lease d. Maturity lease

D. maturity lease

Forms of business combinations include: a. mergers b. consolidations c. holding companies and consolidations d. mergers, consolidations, and holding companies

D. mergers, consolidations, and holding companies

The value of a firm is influenced by three types of financial decisions including all of the following EXCEPT: a. dividend decisions b. financing decisions c. investment decisions d. par value decisions

D. par value decisions

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: a. stock splits b. reverse stock splits c. dividend payout d. stock buybacks

D. stock buybacks

39. All of the following are dividend policies EXCEPT: a. stockholders want dividends and they want them to be consistent b. stockholders prefer the delay of the payment of dividends if there is a corresponding increase in capital gains. c. stockholders of small firms favor a dividend policy of retention. 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.

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.

____ are forms of options. a. Warrants b. Convertible securities c. Leases d. Warrants and convertible securities

D. warrants and convertible securities