Exam 3 (finc mgmt)

Accounting for the time value of money, which of the following is true of an increase in dividend payout at a point in time?

- It is exactly offset by a decrease somewhere else. - The net effect is zero.

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

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

An optimal capital structure will

- minimize the cost of capital - maximize the value of the firm

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

Financial leverage

Which of the following assumptions is necessary for M&M Proposition I to hold?

Individuals can borrow on their own at an interest rate equal to that of the firm.

Which of the following is true of the impact of financial leverage?

It magnifies gains and losses.

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

The WACC initially falls and then rises as debt increases.

Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings (EBIT)?

The rate of return on assets is unaffected by leverage.

True or false: Firm value is maximized when the WACC is minimized.

True

According to the clientele effect, can a firm boost its share price by raising dividends?

Yes, but only if an unsatisfied clientele exists.

The dividend policy question addresses whether the firm should payout:

a larger or smaller percentage of its earnings now.

A stock dividend will result in which of the following?

an increase in shares outstanding a decrease in the value per share

If there are no taxes or flotation costs, then investors will

be indifferent between dividends and a repurchase

The cost of debt will begin to increase as the

degree of leverage increases

A(n) Blank______ occurs whenever a firm makes a payment to its owners from a source other than current or accumulated retained earnings.

distribution

A strong argument can be made that:

dividend policy does not matter.

The optimal level of debt in the presence of corporate taxes and bankruptcy costs occurs at the point at which the present value of distress costs Blank______ the present value of the tax shield benefits.

equals

Which of the following are forms of cash dividends?

extra dividends special dividends regular cash dividends liquidating dividends

The weighted average cost of capital rises at higher levels of debt owing to

financial distress costs

A stock split is a(n) __________ in a firm's shares outstanding without any change in owners' equity.

increase

If the degree of leverage increases, the cost of debt will

increase

The crux of dividend policy is whether the firm should pay out money to its shareholders or take that money and:

invest it for shareholders.

A stock dividend is not a true dividend because

it is not paid in cash

M&M Proposition I does not work with corporate taxes because

levered firms pay lower taxes than unlevered firms

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

share repurchase dividends

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

stock repurchase

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

the clientele effect

A firm's capital structure refers to

the firm's mix of debt and equity

A stock split increases the number of outstanding shares, while

the total owners' equity remains constant

Dividend policy can best be described as the:

time pattern of dividend payout.