EXAM 4 CHAPTER 20, EXAM 4 CHAPTER 19, EXAM 4 CHAPTER 17

E. share repurchase

A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders. A. merger B. acquisition C. payment-in-kind D. stock split E. share repurchase

C. regular cash dividend.

A cash payment made by a firm to its owners in the normal course of business is called a: A. share repurchase. B. liquidating dividend. C. regular cash dividend. D. special dividend. E. extra cash dividend.

A. liquidating dividend.

A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a: A. liquidating dividend. B. regular cash dividend. C. special dividend. D. extra cash dividend. E. share repurchase.

C. all of the distributable cash flow is paid out.

A change in dividend policy does not affect the value of a share of stock as long as: A. the dividend payout ratio remains constant. B. the following dividends are changed by the same amount. C. all of the distributable cash flow is paid out. D. there is an offsetting change in stock repurchases. E. shareholders are given ample warning.

E. securities are loans that mature within 9 months.

A company must file a registration statement with the SEC providing various financial and company information in order to sell new securities to the public. This registration statement does not need to be filed if the: A. issue is less than $50 million. B. securities are loans that mature in one year or less. C. issue is less than $2.5 million. D. securities are valued at less than $5 million and are being sold on the Internet. E. securities are loans that mature within 9 months.

D. Dutch auction.

A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at the various prices. This process is called a: A. homemade dividend. B. tender offer. C. free market sale. D. Dutch auction. E. targeted repurchase.

B. a reverse stock split.

A firm can repurchase its shares in all of the following ways except through: A. a tender offer. B. a reverse stock split. C. a targeted repurchase. D. open market purchases. E. a Dutch auction.

D. investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.

A firm commitment arrangement with an investment banker occurs when the: A. syndicate is in place to handle the issue. B. spread between the buying and selling price is less than one percent. C. issue is solidly accepted in the market as evidenced by a large price increase. D. investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them. E. investment banker sells as much of the security as the market can bear without a price decrease.

C. $6.61

A firm has a market value equal to its book value, excess cash of $1,000, and equity worth $17,800. The firm has 5,000 shares of stock outstanding and net income of $31,200. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase? A. $7.20 B. $6.50 C. $6.61 D. $5.89 E. $6.23

D. $89,600

A firm has a total market value of $89,600 with 6,500 shares of stock outstanding. What will be the total market value of the firm if it does a 1-for-2 reverse stock split? A. $179,200 B. $148,300 C. $122,300 D. $89,600 E. $44,800

C. $36.27

A firm has negotiated a seasoned equity offer that will provide the firm with $1.68 million in net proceeds. The underwriting spread is 7.35 percent and the firm needs to sell 50,000 shares. What is the offer price? A. $36.07 B. $37.25 C. $36.27 D. $34.50 E. $33.60

E. $0

A firm is currently valued at $175 in a boom and $110 in a recession. The chance of either economic state occurring is 50 percent. The firm owes $120 to its debt holders. What is the value of the firm to the shareholders in a recession? A. $22.50 B. $55.00 C. $27.50 D. -$10.00 E. $0

B. $35.00

A firm is currently valued at $300 in a boom and $160 otherwise. The chance of a boom is 35 percent. The firm owes $200 to its debt holders. What is the value of the firm to the shareholders? A. $0 B. $35.00 C. $27.50 D. $209.00 E. $9.00

C. $15,000

A firm's balance sheet shows $15,000 in the common stock account, $315,000 in the capital in excess of par account, and $189,000 in the retained earnings account. The firm just announced a 3-for-2 stock split. What will be the value of the common stock account after the split if the par value per share is $1? A. $10,000 B. $12,500 C. $15,000 D. $18,500 E. $22,500

D. increase a $1 par value to $4.

A one-for-four reverse stock split will: A. increase the par value by 25 percent. B. increase the number of shares outstanding by 400 percent. C. increase the market value but not affect the par value per share. D. increase a $1 par value to $4. E. increase a $1 par value by $4.

A. stock

A payment made by a firm to its owners in the form of new shares of stock is called a _____ dividend. A. stock B. normal C. special D. extra E. liquidating

E. information very similar to the final prospectus but excludes the selling price.

A preliminary prospectus contains: A. exactly the same information as the final prospectus except for the SEC approval. B. the same information as the final prospectus but has bold red letters on the cover. C. only a brief synopsis of the final prospectus. D. only a description of how the funds raised will be used. E. information very similar to the final prospectus but excludes the selling price.

C. a letter of comment suggesting changes is issued by the SEC.

A registration statement is effective on the 20th day after filing unless: A. the SEC is backlogged with statements. B. a tombstone ad is issued indicating its demise. C. a letter of comment suggesting changes is issued by the SEC. D. a syndicate can be formed sooner. E. the issue exceeds $50 million in which case the wait period is 30 days.

D. $31.25

A rights offer was set at four rights plus $25 for each new share. What is the rights-on price if the ex-rights price is $30? A. $35.00 B. $25.00 C. $30.00 D. $31.25 E. $32.50

C. 20 to 25

A small stock dividend is generally defined as a stock dividend of less than _____ percent. A. 10 to 15 B. 15 to 20 C. 20 to 25 D. 25 to 30 E. 30 to 35

D. issuer with an alternative avenue of sale to ensure success of the rights offering.

A standby underwriting arrangement in conjunction with a rights offering provides the: A. issuer with methods to cancel the offering should they so desire. B. issuer with an alternate investment banker if a conflict between the issuer and the original investment banker arises. C. investment banker with an oversubscription privilege to ensure profits are earned. D. issuer with an alternative avenue of sale to ensure success of the rights offering. E. investment bankers with a means of withdrawing from their firm offer.

A. $9.50

A stock has a rights-on price of $20, an ex-rights price of $18.25, and the number of rights needed to buy one new share is 5. Assuming everything else is held constant, what is the subscription price? A. $9.50 B. $11.25 C. $16.67 D. $14.50 E. $21.90

C. does not affect the total value of any of the equity accounts.

A stock split: A. increases the total value of the common stock account. B. decreases the value of the retained earnings account. C. does not affect the total value of any of the equity accounts. D. increases the value of the capital in excess of par account. E. decreases the total owners' equity on the balance sheet.

E. if an unsatisfied clientele group exists.

According to the clientele effect, firms can only boost their stock price: A. by increasing the dividend payout ratio. B. by increasing their regular cash dividends. C. by setting their dividend to the level expected by the highest-dividend-receiving satisfied clientele group. D. by commencing dividend payments if they are a non-dividend-paying firm. E. if an unsatisfied clientele group exists.

C. the firm's financing needs.

According to the pecking-order theory, a firm's leverage ratio is determined by: A. the value of the tax benefit of debt. B. equating the tax benefit of debt to the financial distress costs of debt. C. the firm's financing needs. D. the market rate of interest. E. the profitability of the firm.

B. increase; decrease

All else equal, a stock dividend will _____ the number of shares outstanding and _____ the value per share. A. increase; increase B. increase; decrease C. not change; increase D. decrease; increase E. decrease; decrease

D. having no violations of the Securities Act of 1933 in the past three years.

All of the following are major requirements needed to qualify for shelf registration except: A. having a current rating of investment grade. B. having outstanding stock with a market value in excess of $150 million. C. not defaulting on debt in the past three years. D. having no violations of the Securities Act of 1933 in the past three years. E. having no violations of the Securities Exchange Act of 1934 in the past three years.

D. $4.70

Allison's has a market value equal to its book value. Currently, the firm has excess cash of $1,100 and other assets of $12,400. Equity is worth $13,500. The firm has 2,500 shares of stock outstanding and net income of $10,800. What will be the new earnings per share if the firm uses its excess cash to complete a stock repurchase? A. $4.32 B. $4.50 C. $4.82 D. $4.70 E. $4.40

A. retained earnings will decrease by $99,360.

Alpha Co. is paying a $.72 per share dividend today. There are 138,000 shares outstanding with a par value of $1 per share. As a result of this dividend, the: A. retained earnings will decrease by $99,360. B. retained earnings will decrease by $138,000. C. common stock account will decrease by $138,000. D. common stock account will decrease by $99,360. E. capital in excess of par value account will decrease by $38,640.

A. rights offer.

An equity issue sold to the firm's existing stockholders is called a: A. rights offer. B. general cash offer. C. private placement. D. restricted placement. E. direct placement.

B. crowdfunding.

An equity issue up to $1 million offered in small increments to a large number of people via the Internet is most commonly referred to as: A. an initial public offering. B. crowdfunding. C. a web-based issue. D. a private placement. E. a syndicated issue.

B. stock split.

An increase in a firm's number of shares outstanding without any change in owners' equity is called a: A. special dividend. B. stock split. C. share repurchase. D. tender offer. E. liquidating dividend.

D. 8.57%

An investment is available that pays a tax-free 6 percent. If the corporate tax rate is 30 percent, and you ignore risk, what would you expect the pretax return on taxable bonds to be? A. 4.20% B. 6.00% C. 7.67% D. 8.57% E. 1.80%

D. the underwritten offer price is generally set 48 hours prior to the offering while the rights price must be set much further in advance.

Arguments offered as explanations, with or without market evidence, as to why most U.S. equity issues are sold without rights include all of the following except: A. underwriters buy at an agreed upon price and bear some risk of selling the issue. B. cash proceeds are available sooner in underwriting and the issue is available to a wider market. C. underwriters certify that the offering price is consistent with the true value of the issue. D. the underwritten offer price is generally set 48 hours prior to the offering while the rights price must be set much further in advance. E. underwriters tend to increase the stock price through their sales efforts.

C. 1,138 shares

Assume a firm has a market value equal to its book value, excess cash of $900, other assets of $16,500, and equity valued at $17,400. The firm has 1,200 shares of stock outstanding and net income of $15,400. If the firm spends all of its excess cash on share repurchases, how many shares will be outstanding after the repurchases are completed? (Round your answer up to the nearest whole share) A. 1,148 shares B. 1,135 shares C. 1,138 shares D. 1,164 shares E. 1,142 shares

D. 7.84%

Assume a firm's debtholders are promised payments in one year of $35 if the firm does well and $20 if the firm does poorly. There is a 50/50 chance of the firm doing well or poorly. If bondholders are willing to pay $25.50, what is the promised return to those bondholders? A. 7.33% B. 6.87% C. 7.39% D. 7.84% E. 8.26%

D. $315,000

Assume a firm's latest balance sheet shows $15,000 in the common stock account, $315,000 in the capital in excess of par account, and $189,000 in the retained earnings account. What will be the capital in excess of par account value if the firm does a 5-for-3 stock split? A. $126,000 B. $210,000 C. $283,500 D. $315,000 E. $472,500

B. $32.67

Assume a stock has an ex-rights price of $32. The rights offer has a requirement of 3 rights per new share and a subscription price of $30. What is the rights-on stock price? A. $28.06 B. $32.67 C. $42.00 D. $40.94 E. $38.33

B. $.75

Assume it requires 3 rights to obtain a new share in a rights offering. If the stock's price prior to the ex-rights date is $25 and the ex-rights price is $22.75, what is the value of each right? A. $.67 B. $.75 C. $.56 D. $.60 E. $.72

A. repurchase shares

Assume personal tax rates are lower than corporate tax rates. From a tax-paying shareholder point of view, how should a firm spend its excess cash once it has funded all positive net present value projects? A. repurchase shares B. acquire another firm C. purchase financial assets D. increase cash dividends E. increase executive compensation

E. $1.188

Assume the corporate tax rate is 34 percent, the personal tax rate on interest income is 15 percent, and the personal tax rate on dividends is 10 percent. If the firm earns $5 per share in taxable income and pays out 40 percent of its earnings, how much will a shareholder receive in aftertax income? A. $1.470 B. $1.782 C. $1.096 D. $1.232 E. $1.188

A. -$3,200

Assume there are three upcoming IPOs (A, B, and C) that are priced at $20 a share. You place an order with your broker to purchase 500 shares of each of the three offerings. Further assume that A is oversubscribed and your allocation is only 100 shares. You receive a full allocation on both B and C. Offer A is undervalued by $13, B is overvalued by $8, and C is overvalued by $1. What will be your combined total profit or loss on these three investments? A. -$3,200 B. -$1,125 C. $2,000 D. $1,125 E. $3,200

B. 315; 0

Assume you own 300 shares of ABC stock and receive a stock dividend of 5 percent. As a result, the number of shares you own will change to _____ shares while your total wealth will increase by ___ percent. A. 305; 5 B. 315; 0 C. 305; 0 D. 315; 5 E. 300; 5

A. decrease since the stockholder is losing an option.

Assuming everything else is constant, when a stock goes ex-rights the stock price should: A. decrease since the stockholder is losing an option. B. increase since the corporation no longer has the right to force the stockholder to convert. C. remain the same since an efficient market would anticipate this change. D. remain constant as shareholder value is unaffected by a rights offering. E. decrease by the amount of the tax applicable to the right.

D. tax-free institutions; medium-payout stocks

Based on the concept of the clientele effect, which one of these combinations correctly aligns an investor group with its preferred type of stocks? A. low-tax-bracket individuals; zero-to-low payout stocks B. high-tax-bracket individuals; low-to-medium payout stocks C. corporations; low-to-medium payout stocks D. tax-free institutions; medium-payout stocks E. high-tax-bracket individuals; high-payout stocks

C. $22.50

Bob's Auto Group has 25,000 shares of stock outstanding at a market price of $4.50 a share. What will be the market price per share if the company does a 1-for-5 reverse stock split? A. $.90 B. $1.20 C. $22.50 D. $27.00 E. $29.50

B. $7.27

Brown's Market has 15,000 shares of stock outstanding with a par value of $1 per share and a market value per share of $8. The firm just announced a 10 percent stock dividend. What will the market price per share be after the dividend? A. $7.20 B. $7.27 C. $7.33 D. $8.00 E. $8.80

D. agency costs.

Conflicts of interest between stockholders and bondholders are known as: A. trustee costs. B. financial distress costs. C. dealer costs. D. agency costs. E. underwriting costs.

B. underutilize debt.

Corporations in the U.S. tend to: A. minimize taxes. B. underutilize debt. C. rely less on equity financing than they should. D. have extremely high debt-equity ratios. E. rely more heavily on bonds than stocks as the major source of financing.

A. preregistered securities can be quickly brought to market.

Corporations primarily use the shelf registration method of security sales because: A. preregistered securities can be quickly brought to market. B. SEC registration is avoided. C. their stock is rated as junk. D. they are issuing securities to the general public for the first time. E. they are doing a private offering.

B. debtholders from the added risk of dilution of their claims.

Covenants restricting additional borrowings primarily protect the: A. shareholders' residual interests in the firm. B. debtholders from the added risk of dilution of their claims. C. debtholders from changes in market interest rates. D. managers by avoiding agency costs. E. shareholders from agency costs.

E. $4.50

DDamp;L has a market value equal to its book value, excess cash of $400, other assets of $7,600, equity of $8,000, 200 shares of stock outstanding, and net income of $900. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after the dividend is paid? A. $4.68 B. $4.74 C. $4.59 D. $4.80 E. $4.50

A. $125,000

Davidsons has 15,000 shares of stock outstanding with a par value of $1 per share and a market value of $45 per share. The balance sheet shows $15,000 in the common stock account, $158,000 in the capital in excess of par account, and $132,500 in the retained earnings account. The firm just announced a 50 percent stock dividend. What is the value of the retained earnings account after the dividend? A. $125,000 B. $117,500 C. $132,500 D. $140,000 E. $147,500

C. management feels the probability of default has risen, which limits the firm's debt capacity and thus an equity issue is necessary.

Debt capacity is often offered as a reason for a stock price to decline when additional equity securities are issued. The primary reason that supports this argument is that: A. the high issue costs of a debt offering must be paid by the shareholders. B. an additional equity issue reduces the debt capacity of a firm. C. management feels the probability of default has risen, which limits the firm's debt capacity and thus an equity issue is necessary. D. unless additional debt is issued in the future, stock dividends will tend to decline after the new securities are issued. E. additional equity is only issued when a firm cannot meet its current debt obligations, thereby signaling the firm is on the verge of bankruptcy.

B. $46.71

Deep Water Drilling has 160,000 shares of stock outstanding at a market price of $109 a share. The company has just announced a 7-for-3 stock split. What will the market price per share be after the split? A. $38.27 B. $46.71 C. $48.40 D. $46.18 E. $48.80

B. loss in existing shareholder's value.

Dilution commonly refers to the: A. increase in stock value due to wider ownership of stock. B. loss in existing shareholder's value. C. loss in new shareholder's equity. D. splitting of a single share of stock into multiple shares. E. issuance of debt in order to repurchase shares.

A. gross spread plus other direct expenses.

Direct expenses of an IPO include the: A. gross spread plus other direct expenses. B. gross spread and underpricing. C. abnormal returns and underpricing. D. Green Shoe option and the abnormal returns. E. gross spread, Green Shoe option, and other direct expenses.

B. $14.86

Downtown Deli has 2,000 shares of stock outstanding with a par value of $1 per share and a market value of $26 per share. The balance sheet shows $2,000 in the common stock account, $9,500 in the capital in excess of par account, and $14,500 in the retained earnings account. The firm just announced a stock dividend of 75 percent. What is the market value per share after the dividend? A. $36.00 B. $14.86 C. $45.50 D. $13.50 E. $12.00

B. first-round financing

Dream Makers has expended almost all of its start-up funds and is seeking venture capital to begin manufacturing. Which type of financing is it seeking? A. mezzanine financing B. first-round financing C. bridge financing D. seed money financing E. second-round financing

D. $5.00

Edie's Health Supply has 125,000 shares of stock outstanding with a par value of $1 per share and a market value of $5 a share. The company has retained earnings of $76,500 and capital in excess of par of $340,000. The company just announced a 1-for-5 reverse stock split. What will be the par value per share after the split? A. $.20 B. $.25 C. $2.50 D. $5.00 E. $10.00

D. underpriced, in part, to counteract the winner's curse.

Empirical evidence suggests that new equity issues are generally: A. priced efficiently by the market. B. overpriced by investor excitement concerning a new issue. C. overpriced resulting from SEC regulation. D. underpriced, in part, to counteract the winner's curse. E. underpriced resulting from SEC regulation.

A. decrease perhaps because the issue reflects management's view the stock is overvalued.

Empirical evidence suggests that upon announcement of a seasoned equity issue, current stock prices generally: A. decrease perhaps because the issue reflects management's view the stock is overvalued. B. remain fairly constant since an efficient market anticipates a new equity issue. C. decrease perhaps because the issues are associated with positive NPV projects. D. increase because the market supply is always less than demand. E. increase because underwriters exercise their green shoe option.

B. maintaining a consistent dividend policy

Financial executives place the greatest importance on which one of these factors when setting dividend policy? A. setting a high-dividend payout ratio even when earnings are unstable B. maintaining a consistent dividend policy C. increasing dividends even if they need to be lowered in the near future D. reducing dividends anytime future earnings are in doubt E. attracting institutional investors

A. are reluctant to cut dividends.

Financial managers: A. are reluctant to cut dividends. B. tend to ignore past dividend policies. C. tend to prefer cutting dividends every time quarterly earnings decline. D. prefer cutting dividends over incurring flotation costs. E. place little emphasis on dividend policy consistency.

C. allow their dividend changes to lag their earnings changes.

Firms generally: A. set high target payout ratios when they are relatively young. B. decrease their dividends as soon as they expect earnings to decline. C. allow their dividend changes to lag their earnings changes. D. set short-term target ratios of dividends to earnings. E. set the dividend growth rate equal to the firm's earnings growth rate.

A. $2,055,289

Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds via a seasoned stock offering. Assume the firm will incur $140,000 in indirect costs and pay 8.63 percent of the gross proceeds in direct costs. How much does the firm need to raise in total to cover all of the costs as well as fund the new project? A. $2,055,289 B. $2,037,825 C. $2,068,513 D. $1,914,650 E. $1,984,294

B. is more desirable than a cash dividend.

From a tax-paying investor's point of view, a stock repurchase: A. is equivalent to a cash dividend. B. is more desirable than a cash dividend. C. has the same tax effects as a cash dividend. D. is more highly taxed than a cash dividend. E. creates a tax liability even if the investor does not sell any of the shares he owns.

B. 30; the underwriting syndicate

Green Shoe options generally last ____ days and benefit ____. A. 30; the issuer B. 30; the underwriting syndicate C. 60 days; the underwriting syndicate D. 60 days; the issuer E. 90 days; both the issuer and the underwriting syndicate

B. a lower interest rate than

If a firm issues debt and includes protective covenants in the indenture then the firm's debt will probably be issued at _____ similar debt without thecovenants. A. a variable interest rate rather than the fixed rate paid on B. a lower interest rate than C. a significantly higher interest rate than D. an interest rate equal to that of E. a slightly higher interest rate than

C. submit the number of rights required plus the subscription price.

If current shareholders want to acquire one share of stock under a rights plan they must: A. acquire new shares of stock that are being issued with rights attached. B. simply pay a registration fee plus the subscription price per share requested. C. submit the number of rights required plus the subscription price. D. inform the issuer and submit the market price per share desired. E. exchange their current shares for new shares that have rights attached.

A. earnings per share.

Ignore commissions, taxes, and other imperfections. If a firm substitutes a repurchase for a cash dividend, the primary difference will be an increase in the A. earnings per share. B. total value received by each investor. C. total earnings of the firm. D. excess cash reserves of the firm. E. number of shares outstanding.

D. higher dividend policy.

Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a: A. lower dividend policy. B. constant dividend policy. C. zero-dividend policy. D. higher dividend policy. E. restrictive dividend policy.

B. ex-dividend date.

Ignoring taxes and all else held constant, the market value of a stock should decrease by the amount of the dividend on the: A. dividend declaration date. B. ex-dividend date. C. date of record. D. date of payment. E. day after the date of payment.

B. a commission on each share sold.

In a best efforts offering the investment bank makes its money primarily by earning: A. the spread between the buying and offering price. B. a commission on each share sold. C. a negotiated percentage of the offering price. D. a flat fee charged for services rendered. E. the difference between the offer price and the warrant price.

D. the number of shares outstanding decreases but owners' equity is unchanged.

In a reverse stock split: A. the number of shares outstanding increases and owners' equity decreases. B. the firm buys back existing shares of stock on the open market. C. the firm sells new shares of stock on the open market. D. the number of shares outstanding decreases but owners' equity is unchanged. E. shareholders make a cash payment to the firm.

C. 40

In a typical deal, the venture capitalist will receive at least ______ percent of the equity of financed firm. A. 5 B. 20 C. 40 D. 50 E. 75

E. increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

In a world with taxes and financial distress, when a firm is operating with the optimal capital structure the: A. debt-equity ratio will be less than optimal. B. weighted average cost of capital will be maximized. C. firm will be all-equity financed. D. required return on assets will be at its maximum point. E. increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

D. considerably greater.

In comparison to debt issuance expenses, the total direct costs of equity issues are: A. considerably less. B. the same. C. minimally less. D. considerably greater. E. minimally greater.

E. vary significantly across industries.

In general, the capital structures used by U.S. firms: A. tend to overweigh debt in relation to equity. B. are easily explained in terms of earnings volatility. C. are easily explained by analyzing the types of assets owned by the various firms. D. tend to be those which maximize the use of the firm's available tax shelters. E. vary significantly across industries.

B. stockholders.

Indirect costs of bankruptcy are born principally by: A. bondholders. B. stockholders. C. managers. D. the federal government. E. the firm's suppliers.

E. include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

Indirect costs of financial distress: A. effectively limit the amount of equity a firm issues. B. serve as an incentive to increase the financial leverage of a firm. C. include costs such as legal and accounting fees. D. tend to increase as the debt-equity ratio decreases. E. include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

E. the owner-manager to reduce shirking and perquisite consumption.

Issuing debt instead of new equity in a closely held firm is most apt to cause: A. the owner-manager to work less hard and shirk duties. B. the owner-manager to consume more perquisites because the cost is passed to the debtholders. C. both more shirking and perquisite consumption since the government provides a tax shield on debt. D. agency costs to fall as owner-managers do not need to worry about other shareholders. E. the owner-manager to reduce shirking and perquisite consumption.

B. $38

Jensen's has a market value equal to its book value, excess cash of $500, other assets of $9,500, and equity worth $10,000. The firm has 250 shares of stock outstanding and net income of $1,400. What will the stock price per share be if the firm pays out its excess cash as a cash dividend? A. $36 B. $38 C. $40 D. $42 E. $44

A. $.14

Lasko's has 250,000 shares of stock outstanding, $400,000 in perpetual annual earnings, and a discount rate of 16 percent. The firm is considering a new project that has initial costs of $350,000 and annual perpetual cash flows of $60,000. What will be the change in the firm's stock price per share if this project is accepted? A. $.14 B. $.10 C. $.07 D. $1.02 E. $31.06

C. $0

Lee started a firm which he recently took public with a new stock issue of 1 million shares. As the firm's founder he personally owns 1.2 million shares, all of which he owned prior to the new stock issue. The offer price of the IPO was $16 a share. The price paid to the firm was $14.20 a share and the closing price on the IPO date was $19 a share. How much of a loss did Lee personally experience due to the IPO's underpricing? A. $1.2 million B. $2.4 million C. $0 D. $3.6 million E. $5.76 million

B. Leslie is entitled to the dividend but Marti is not.

Leslie purchased 100 shares of GT stock on Wednesday, June 7th. Marti purchased 100 shares of GT stock on Thursday, July 8th. GT declared a dividend on June 20th to shareholders of record on July 12th that is payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information? A. Neither Leslie nor Marti are entitled to the dividend. B. Leslie is entitled to the dividend but Marti is not. C. Marti is entitled to the dividend but Leslie is not. D. Both Marti and Leslie are entitled to the dividend. E. Both Marti and Leslie are entitled to one-half of the dividend amount.

D. obtain approval from the board of directors.

Management's first step in any issue of securities to the public is to: A. file a registration form with the SEC. B. distribute copies of the preliminary prospectus. C. distribute copies of the final prospectus. D. obtain approval from the board of directors. E. prepare the tombstone advertisement.

D. need for financial slack and industry averages

Many firms base their capital structure decisions on which two factors? A. industry averages and tax rates B. interest and tax rates C. need for financial slack and current interest rates D. need for financial slack and industry averages E. types of assets held and current interest rates

E. $69,000

Mary owns a floral and gift shop valued at $150,000. If she keeps the shop open 5 days a week, EBIT is $75,000. If the shop remains open 6 days a week EBIT increases to $92,000 annually. Mary needs an additional $50,000 which she can raise by either selling stock or issuing debt at an interest rate of 7 percent. Ignore taxes. What will the cash flow for the year be to Mary if she issues stock and remains open 6 days a week? A. $92,000 B. $61,333 C. $92,000 D. $42,000 E. $69,000

E. $67,880

Mary owns a gift shop valued at $150,000. If she keeps the shop open 5 days a week, EBIT is $75,000. If the shop remains open 6 days a week EBIT increases to $92,000 annually. Mary needs an additional $50,000 which she can raise by either selling stock or issuing debt that will require annual payments of $7,120 for interest and principal. Ignore taxes. What will the cash flow for the year be to Mary if she issues debt and remains open 5 days a week? A. $92,000 B. $61,333 C. $92,000 D. $42,000 E. $67,880

A. $39,180

Murphy's has shares of stock outstanding with a par value of $1 per share and a market value of $24.60 per share. The balance sheet shows $32,500 in the capital in excess of par account, $12,000 in the common stock account, and $68,700 in the retained earnings account. The firm just announced a 10 percent stock dividend. What will the balance be in the retained earnings account after the dividend? A. $39,180 B. $48,300 C. $59,120 D. $67,520 E. $40,380

C. result in higher issue costs than do competitive offers.

Negotiated offers generally: A. are used as a last resort. B. involve an underwriting syndicate. C. result in higher issue costs than do competitive offers. D. involve only large issuers. E. reduce the probability an issue will be successful.

A. 65,772

Nelson's Metallurgy needs $1.36 million to fund an expansion project. The firm has decided to raise the funds through a negotiated offering. The terms of the offer include an offer price of $22.50 a share and an underwriting spread of 8.1 percent. How many shares must the firm sell in order to raise the funds it needs? A. 65,772 B. 81,414 C. 65,340 D. 81,200 E. 55,915

D. a stock dividend.

Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all of its available cash to fund its rapid growth. The market price of its stock is currently trading in the upper end of its preferred trading range. The firm could consider: A. a liquidating dividend. B. an extra cash dividend. C. a reverse stock split. D. a stock dividend. E. a cash distribution.

B. maintaining a consistent dividend policy

Of the following factors, which one is considered to be the primary factor affecting a firm's dividend decision? A. considering the personal taxes of company stockholders B. maintaining a consistent dividend policy C. attracting retail investors D. attracting institutional investors E. avoiding flotation costs

D. $400

On May 18th, you purchased 1,000 shares of Buy Lo stock. On June 5th, you sold 200 shares of this stock for $21 a share. You sold an additional 400 shares on July 8th at a price of $22.50 a share. The company declared a $.50 per share dividend on June 25th to holders of record as of Thursday, July 10th. This dividend is payable on July 31st. How much dividend income will you receive on July 31st as a result of your ownership of Buy Lo stock? A. $100 B. $200 C. $300 D. $400 E. $500

E. the age of the information disclosure.

One argument against the use of shelf-registration is: A. that it is limited to only technology and manufacturing firms which provides those industries with a market advantage. B. that it provides an unfair advantage to debt issues. C. that it unfairly increases the market price of the registered security. D. the ability to use the dribble method in conjunction with the shelf-registration. E. the age of the information disclosure.

C. stockholders expropriate value from bondholders by selecting high-risk projects.

One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy: A. the firm will rank all projects and select the project which results in the highest expected firm value. B. bondholders expropriate value from stockholders by selecting high-risk projects. C. stockholders expropriate value from bondholders by selecting high-risk projects. D. the firm will always select the lowest-risk project available. E. the firm will select only all-equity financed projects.

B. the firm turning down positive NPV projects that would clearly be accepted if the firm were all-equity financed.

One of the indirect costs of bankruptcy is the incentive toward underinvestment. Underinvestment generally would result in: A. the firm selecting all projects with positive NPVs. B. the firm turning down positive NPV projects that would clearly be accepted if the firm were all-equity financed. C. bondholders contributing the full amount of any new investment, but both stockholders and bondholders sharing in the benefits of those investments. D. shareholders making decisions based on the best interests of the bondholders. E. the firm accepting more projects than it would if the probability of bankruptcy was ignored.

B. underpricing.

Oversubscription is most commonly the result of: A. unsuccessful book building. B. underpricing. C. exercising the Green Shoe option. D. a negotiated, rather than a competitive underwriting. E. unexercised rights.

A. dividends.

Payments made out of a firm's earnings to its owners in the form of cash or stock are called: A. dividends. B. distributions. C. share repurchases. D. payments-in-kind. E. stock splits.

B. red herring.

Potential investors primarily obtain detailed information regarding a new issue by reading the: A. SEC's comment letter. B. red herring. C. letter of commitment. D. registration statement. E. rights offering.

D. $3.59

Priscilla owns 500 shares of Deltona stock. It is January 1, 2016, and the company recently issued a statement that it will pay a $1 per share dividend on December 31, 2016, a $2.50 per share dividend on December 31, 2017, and then cease all future dividends. Priscilla does not want any dividend income this year but does want as much dividend income as possible next year. Priscilla can earn 8.5 percent on her investments. Ignoring taxes, what will Priscilla's homemade dividend per share be in 2017? A. $0 B. $3.50 C. $2.50 D. $3.59 E. $1.00

D. maintain a minimum share price set by a stock exchange.

Probably the best argument for a reverse stock split is to: A. decrease the liquidity of a stock. B. decrease the market value per share. C. increase the number of stockholders. D. maintain a minimum share price set by a stock exchange. E. raise additional capital from current stockholders.

D. 13

Regional Power wants to raise $2.4 million in new equity via a rights offering with a subscription price of $12. There are currently 2.6 million shares outstanding, each with one right. How many rights are needed to purchase one new share? A. 12 B. 18 C. 20 D. 13 E. 6

A. $18

Robinson's has 15,000 shares of stock outstanding with a market price of $6 a share. What will the market price per share be if the firm does a 1-for-3 reverse stock split? A. $18 B. $24 C. $42 D. $48 E. $54

D. 22,500 shares

Robinson's has 15,000 shares of stock outstanding with a par value of $1 per share and a market price of $36 a share. How many shares of stock will be outstanding of the firm does a 3-for-2 stock split? A. 10,000 shares B. 12,500 shares C. 20,000 shares D. 22,500 shares E. 27,500 shares

A. $1,358,000

Samuel's has 42,000 shares of stock outstanding with a par value of $1 per share and a market price per share of $41. The balance sheet shows $1,358,000 in the capital in excess of par account and $2,212,500 in the retained earnings account. The firm just announced a 50 percent stock dividend. What is the value of the capital in excess of par account after the dividend? A. $1,358,000 B. $612,500 C. $518,000 D. $497,000 E. $221,900

D. $7,500

Samuel's has shares of stock outstanding with a par value of $1 per share and a market-to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock account, $58,000 in the capital in excess of par account, and $32,500 in the retained earnings account. The firm just announced a 50 percent stock dividend. What is the value of the common stock account after the dividend? A. $10,000 B. $8,500 C. $9,000 D. $7,500 E. $5,000

C. $41.14

Schaeffer Shippers announced on May 1 that it will pay a dividend of $1.20 per share on June 15 to all holders on record as of May 31st. The firm's stock price closed today at $42 a share. Assume all investors are in the 28 percent tax bracket. If tomorrow is the ex-dividend date, what would you expect the opening price to be tomorrow morning assuming all else is held constant? A. $42.00 B. $43.20 C. $41.14 D. $42.94 E. $41.66

D. 2.50

Schraeder Corporation has 20,000 shares outstanding at $30 each. The firm expects to raise $200,000 via a rights offering at a subscription price of $25. How many rights are required for each new share? A. 1.25 B. 1.50 C. 2.00 D. 2.50 E. 2.25

E. valued at less than $5 million.

Security issues that are governed by Regulation A are: A. distributed solely among current company employees and directors. B. sold in full to a single purchaser. C. those that only include securities currently held by corporate insiders. D. limited such that only current shareholders can purchase them. E. valued at less than $5 million.

E. can be difficult to verify.

Share repurchases: A. reduce a firm's demand for external financing. B. offer less tax advantages to shareholders than do cash dividends. C. tend to increase agency costs. D. are always positive net present value investments. E. can be difficult to verify.

B. agency costs to bondholders.

Shareholders sometimes pursue selfish strategies such as taking large risks or paying excessive dividends. These actions generally result in: A. no action by debtholders since these are shareholder concerns. B. agency costs to bondholders. C. investments with risks similar to those of the current firm. D. undertaking scale-enhancing projects. E. lower agency costs, as shareholders have more control over the firm's assets.

C. in the same financial position if they sell or if they exercise their rights.

Shareholders who have rights are always: A. better off if they exercise the rights rather than selling them. B. better off if they sell their rights rather than exercising them. C. in the same financial position if they sell or if they exercise their rights. D. able to purchase one new share for each right they own. E. financially disadvantaged any time a rights offer is made, regardless of any action they take.

A. adjust the market price of a stock such that it falls within a preferred trading range.

Stock splits are often used to: A. adjust the market price of a stock such that it falls within a preferred trading range. B. decrease the excess cash held by a firm. C. increase both the number of shares outstanding and the market price per share. D. increase the total equity of a firm. E. adjust the debt-equity ratio such that it falls within a preferred range.

B. ANSC. high leverage.

Studies have found that firms with large investments in tangible assets tend to have: A. the same capital structure as the average firm in the overall market. A. zero debt. B. ANSC. high leverage. C. less debt. D. about the same debt-equity ratios and firms with small investments in tangible assets.

A. $27.78

TL Company has expected earnings of $75 in one year if it does well and $25 if it does poorly. The firm has outstanding debt of $50 that is due in one year. However, given the financial distress costs, the debtholders will only receive $40 in one year if the firm does well and $15 if it does poorly. There is a 60 percent chance the firm will do well and a 40 percent chance that it will do poorly. What is the current value of the debt if the interest rate on bonds is 8 percent? A. $27.78 B. $27.50 C. $30.00 D. $26.67 E. $28.40

B. retained earnings will decrease by $98,400.

The Cameron Co. is paying a dividend of $.82 a share today. There are 120,000 shares outstanding with a par value of $1 per share. As a result of this dividend, the: A. retained earnings will decrease by $120,000. B. retained earnings will decrease by $98,400. C. common stock account will decrease by $98,400. D. common stock account will increase by $120,000. E. capital in excess of par value account will decrease by $21,600.

B. bankruptcy is a disadvantage to debt.

The MM theory with taxes implies that firms should issue maximum debt. In practice, this does not occur because: A. debt is more risky than equity. B. bankruptcy is a disadvantage to debt. C. the weighted average cost of capital is inversely related to the debt-equity ratio. D. the weighted average cost of capital is directly related to the debt-equity ratio. E. U.S. regulations require the debt-equity ratio of publicly-traded firms to be in the range of .3 to .7.

?

The Market Place recently offered 5,000 shares of stock for sale via a Dutch auction. The firm received bids as follows: 500 shares at $22.50; 2,500 shares at $22.20; 3,300 shares at $22; and 5,500 shares at $21. Ignoring all costs, how much will the firm receive from this auction? A. $110,000 B. $105,000 C. $138,600 D. $112,500 E. $247,800

E. $60.00

The Rent It Company declared a dividend of $.60 a share on October 20th to holders of record on Monday, November 1st. The dividend is payable on December 1st. You purchased 100 shares of this stock on Wednesday, October 27th. How much dividend income will you receive on December 1st from the Rent It Company? A. $0 B. $1.50 C. $6.00 D. $15.00 E. $60.00

A. $35.75

The Retail Outlet has 6,000 shares of stock outstanding and the current market value of the firm is $429,000. The company just announced a 2-for-1 stock split. What will be the market price per share after the split? A. $35.75 B. $40.50 C. $80.50 D. $71.50 E. $50.25

B. $234,000

The Retail Outlet has 8,000 shares of stock outstanding with a par value of $1 per share. The current market value of the firm is $620,000. The balance sheet shows a capital in excess of par account value of $66,000 and retained earnings of $234,000. The company just announced a 3-for-1 stock split. What will be the retained earnings account balance after the split? A. $117,000 B. $234,000 C. $351,000 D. $410,000 E. $468,000

E. 312,500

The Tinslow Co. has 125,000 shares of stock outstanding at a market price of $93 a share. The company has just announced a 5-for-2 stock split. How many shares of stock will be outstanding after the split? A. 50,000 B. 75,000 C. 156,250 D. 175,000 E. 312,500

C. 5.00

The Wordsmith Corporation has 40,000 shares outstanding with a market price of $25 each. The firms expects to raise $200,000 via a rights offering at a subscription price of $20. How many rights must be submitted to acquire one new share? A. .20 B. .80 C. 5.00 D. 1.25 E. 4.00

E. homemade dividends.

The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is referred to as: A. the perfect foresight model. B. MM Proposition I. C. capital structure irrelevancy. D. homemade leverage. E. homemade dividends.

E. dividend payout.

The annual dividend per share stated as a percentage of the annual earnings per share is called the: A. dividend yield. B. dividend per share. C. annual yield. D. dividend rate. E. dividend payout.

E. high cash dividends.

The behavioral finance concept of self-control is an argument in favor of: A. frequent stock splits. B. low cash dividends. C. stock dividends. D. reverse stock splits. E. high cash dividends.

C. indirect bankruptcy

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs. A. flotation B. direct bankruptcy C. indirect bankruptcy D. financial solvency E. capital structure

B. ex-dividend

The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the _____ date. A. ex-rights B. ex-dividend C. record D. payment E. declaration

C. date of record.

The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the: A. ex-rights date. B. ex-dividend date. C. date of record. D. date of payment. E. declaration date.

E. declaration

The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date. A. ex-rights B. ex-dividend C. record D. payment E. declaration

D. date of payment.

The date on which the firm mails out its declared dividends is called the: A. ex-rights date. B. ex-dividend date. C. date of record. D. date of payment. E. declaration date.

C. The investment policy is set ahead of time and not altered by changes in dividend policy.

The dividend-irrelevance proposition of Miller and Modigliani depends on which one of the following relationships between investment policy and dividend policy? A. The level of investment does not influence or matter to the dividend decision. B. Once dividend policy is set the investment decision can be made. C. The investment policy is set ahead of time and not altered by changes in dividend policy. D. Since dividend policy is irrelevant there is no relationship between investment policy and dividend policy. E. Miller and Modigliani were only concerned about capital structure.

E. financial distress

The explicit and implicit costs associated with corporate default are referred to as the _____ costs of a firm. A. flotation B. default beta C. direct bankruptcy D. indirect bankruptcy E. financial distress

C. direct bankruptcy

The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs. A. flotation B. beta conversion C. direct bankruptcy D. indirect bankruptcy E. unlevered

B. general cash offer.

The first equity issue offered to the general public by a firm is a: A. rights offer. B. general cash offer. C. restricted placement. D. direct placement. E. seasoned offering.

B. initial public offering.

The first public equity issue offered by a company is commonly referred to as a(n): A. initial private offering. B. initial public offering. C. secondary offering. D. seasoned new issue. E. registered issue.

C. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources.

The free cash flow hypothesis states: A. that firms with greater free cash flow will pay more in dividends thereby reducing the risk of financial distress. B. that firms with greater free cash flow should issue new equity to help minimize the wasting of resources by managers. C. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources. D. that firms will higher levels of free cash flow should reduce their debt levels. E. that firms with higher levels of free cash flow should reward their managers with bonuses.

A. cover oversubscriptions.

The green shoe provision is used to: A. cover oversubscriptions. B. address unsold shares. C. provide additional reward to investment bankers for a risky issue. D. provide funding to investment bankers for unsold shares. E. reduce the number of shareholders.

B. causes stockholders to increase their expectations of future cash flows.

The information content effect implies that stock prices will rise when dividends are increased provided that the dividend increase: A. is denoted as a one-time event. B. causes stockholders to increase their expectations of future cash flows. C. is greater than the average historical dividend increase. D. is substantial in both dollar amount and percentage terms. E. is combined with a stock repurchase.

C. management believes the future earnings of the firm will be strong.

The information content of a dividend increase generally signals that: A. the firm has a one-time surplus of cash. B. the firm has several net present value projects to pursue. C. management believes the future earnings of the firm will be strong. D. the firm has more cash than it needs due to sales declines. E. future dividends will be lower.

A. the distribution of income to stockholders is less than the personal tax rate on interest income.

The introduction of personal taxes may reveal a disadvantage to the use of debt if the personal tax rate on: A. the distribution of income to stockholders is less than the personal tax rate on interest income. B. the distribution of income to stockholders is greater than the personal tax rate on interest income. C. the distribution of income to stockholders is equal to the personal tax rate on interest income. D. interest income is zero. E. dividends and interest are equal.

C. three

The last date on which you can purchase shares of stock and still receive the dividend is the date _____ business day(s) prior to the date of record. A. zero B. one C. three D. five E. seven

B. bankruptcy.

The legal proceeding for liquidating or reorganizing a firm operating in default is called a: A. tender offer. B. bankruptcy. C. merger. D. takeover. E. proxy fight.

A. private financial marketplace for servicing small, young firms.

The market for venture capital refers to the: A. private financial marketplace for servicing small, young firms. B. corporate bond market. C. market for selling unsubscribed rights. D. market for selling seasoned equity securities. E. market for all private issues.

A. information content effect.

The market's reaction to the announcement of a change in the firm's dividend payout is referred to as the: A. information content effect. B. clientele effect. C. efficient markets hypothesis. D. MM Proposition I. E. MM Proposition II.

B. clientele effect.

The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the: A. information content effect. B. clientele effect. C. efficient markets hypothesis. D. MM Proposition I. E. MM Proposition II.

E. debt-equity ratio selected results in the lowest possible weighed average cost of capital.

The optimal capital structure has been achieved when the: A. debt-equity ratio is equal to 1. B. weight of equity is equal to the weight of debt. C. cost of equity is maximized given a pretax cost of debt. D. debt-equity ratio is such that the cost of debt exceeds the cost of equity. E. debt-equity ratio selected results in the lowest possible weighed average cost of capital.

C. maximizes; minimizes

The optimal capital structure of a firm _____ the marketable claims and _____ the nonmarketable claims against the cash flows of the firm. A. minimizes; minimizes B. minimizes; maximizes C. maximizes; minimizes D. maximizes; maximizes E. equates; (leave blank)

D. lower probability of financial distress.

The optimal capital structure will tend to include more debt for firms with: A. the highest depreciation deductions. B. the lowest marginal tax rate. C. substantial tax shields from other sources. D. lower probability of financial distress. E. less taxable income.

C. of a firm will vary over time as taxes and market conditions change.

The optimal capital structure: A. will be the same for all firms in the same industry. B. will remain constant over time unless the firm makes an acquisition. C. of a firm will vary over time as taxes and market conditions change. D. places more emphasis on the operations of a firm rather than the financing of a firm. E. is unaffected by changes in the financial markets.

A. use internal financing first.

The pecking order states that firms should: A. use internal financing first. B. always issue debt then the market won't know when management thinks the security is overvalued. C. issue new equity first. D. issue debt first. E. always issue equity to avoid financial distress costs.

B. bidders.

The price at which offered securities are sold in a Dutch auction underwriting is determined by the: A. lead underwriter. B. bidders. C. SEC. D. issuing firm. E. venture capitalists.

D. weighted average cost of capital is minimized.

The value of a firm is maximized when the: A. cost of equity is maximized. B. tax rate is zero. C. levered cost of capital is maximized. D. weighted average cost of capital is minimized. E. debt-equity ratio is minimized.

A. subscription price and the number of rights needed to acquire a new share.

To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price, the: A. subscription price and the number of rights needed to acquire a new share. B. amount of new equity to be raised and the number of rights needed to acquire a new share. C. amount of new equity to be raised and the standby fee. D. detachment date and the subscription price. E. the number of rights needed to acquire a new share and the number of shares currently owned.

B. firm commitment; best efforts

Under the _______ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _______ method, the underwriter does not purchase the shares but merely acts as an agent. A. best efforts; firm commitment B. firm commitment; best efforts C. negotiated offer; competitive offer D. competitive offer; negotiated offer E. seasoned; unseasoned

A. intermediaries that raise funds from outside investors.

Venture capitalists are: A. intermediaries that raise funds from outside investors. B. investors who take a hands-off approach to investment management. C. generally interested in primarily long-term investments. D. easily contacted and tend to assist with most requests received. E. generally granted a maximum of 25 percent of a firm's equity.

B. an equity position and board of director positions.

Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for this financing, venture capitalists generally receive: A. the personal financial guarantees of all current owners. B. an equity position and board of director positions. C. the right to set the offer price in any future initial public offering. D. the protection provided by a court-appointed trustee. E. a government-funded guarantee of repayment for all funds provided.

A. hold voting preferred stock which grants them priorities over common stockholders in the event of a sale or liquidation.

Venture capitalists will frequently: A. hold voting preferred stock which grants them priorities over common stockholders in the event of a sale or liquidation. B. hold voting common stock which grants them priorities over preferred stockholders in the event of a sale or liquidation. C. hold nonvoting preferred stock. D. hold nonvoting common stock. E. not hold any significant amount of stock.

B. $14.17

Western Markets has 150,000 shares outstanding with a market price per share of $15. Each share is entitled to one right. If the firm sets a rights offer as 5 rights plus $10 for each new share, what will be the ex-rights price per share? A. $12.23 B. $14.17 C. $15.83 D. $13.77 E. $14.49

C. cash flow to stockholders equals the cash flow to bondholders.

When [(1 - tC) × (1 - tS) = (1 - tB)], then the: A. firm should hold no debt. B. value of the levered firm is greater than the value of the unlevered firm. C. cash flow to stockholders equals the cash flow to bondholders. D. tax shield on debt is exactly offset by higher levels of dividends. E. tax shield on debt is exactly offset by higher capital gains.

B. increases; increases.

When firms issue more debt, the present value of the tax shield on debt _____ while the present value of financial distress costs: A. decreases; decreases. B. increases; increases. C. decreases; remains constant. D. decreases; increases. E. increases; remains constant.

B. the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield.

When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where: A. the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield. B. the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield. C. the increase in the present value of distress costs from an additional dollar of debt is less than the increase of the present value of the debt tax shield. D. distress costs as well as debt tax shields are zero. E. distress costs as well as debt tax shields are maximized.

C. television broadcasting stations

Which one of the following industries tends to have the highest leverage ratio? A. natural gas distribution B. computer C. television broadcasting stations D. educational services E. biological products

A. The tax on capital gains is deferred until the gain is realized.

Which one of the following is an argument in favor of a low dividend policy? A. The tax on capital gains is deferred until the gain is realized. B. Few, if any, positive net present value projects are available to the firm. C. A preponderance of stockholders have minimal taxable income. D. A majority of stockholders have other investment opportunities that offer higher rewards with similar risk characteristics. E. Corporate tax rates exceed personal tax rates.

E. agency costs related to excess cash reserves

Which one of the following is cited as an argument for a high dividend payout? A. flotation costs involved with a new securities issue B. high personal tax rates relative to corporate rates C. desire to maintain constant dividends over time D. restrictive covenant contained in a bond indenture agreement E. agency costs related to excess cash reserves

E. conserve cash

Which one of the following is not a reason why firms choose repurchases rather than dividends? A. provide flexibility B. increase the value of existing stock options C. provide shareholders with a tax advantage D. offset dilution E. conserve cash

C. Capital structures are fairly constant across industries.

Which one of the following is not empirically correct? A. Some firms use no debt. B. Most corporations have relatively low debt-asset ratios. C. Capital structures are fairly constant across industries. D. Debt levels across industries vary widely. E. Debt ratios in most countries are considerably less than 100 percent.

C. auditing the financial statements

Which one of the following is not one of the four main functions provided by underwriters? A. assumption of some market risk B. responsibility for marketing securities C. auditing the financial statements D. certifying the value of an offering E. establishing the offer price

E. Investors will generally view an increase in debt as a positive sign for the firm's value.

Which one of the following is true? A. A firm with low anticipated profits will likely take on a high level of debt. B. A successful firm will probably be all-equity financed. C. Rational firms raise debt levels when profits are expected to decline. D. Rational investors are likely to infer a firm is more valuable when its debt level declines. E. Investors will generally view an increase in debt as a positive sign for the firm's value.

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

Which one of the following lists dividend events in the correct chronological order from earliest to latest? A. date of record, declaration date, ex-dividend date B. date of record, ex-dividend date, declaration date C. declaration date, date of record, ex-dividend date D. declaration date, ex-dividend date, date of record E. ex-dividend date, date of record, declaration date

D. providing checking account management

Which one of the following services is least apt to be offered to a corporation by an investment bank? A. formulating a method to issue new securities B. pricing of new securities C. facilitating a merger D. providing checking account management E. selling new securities

C. The subscription price is generally less than the market price.

Which one of the following statements is true concerning a rights offering? A. The subscription price is generally greater than the market price. B. The subscription price must be greater than the ex-rights price. C. The subscription price is generally less than the market price. D. The ex-rights price is generally higher than the rights-attached price. E. The market price tends to increase on the ex-rights date.

B. Underwriters generally only sell shares at or above the offer price.

Which one of these applies to the after market period? A. The red herrings are distributed. B. Underwriters generally only sell shares at or above the offer price. C. Book building is conducted. D. The lead underwriter determines the offer price. E. Underwriting negotiations are completed.

C. a firm with high financial distress paying additional dividends

Which one of these best exemplifies "milking the property"? A. a firm paying a premium to acquire a competitor B. a firm demanding a premium to be acquired without a proxy fight C. a firm with high financial distress paying additional dividends D. an all-equity firm repurchasing shares E. a firm with high financial distress using expected dividends to repay debt

B. maturity in excess of five years

Which one of these characteristics is least applicable to term loans? A. avoidance of SEC registration B. maturity in excess of five years C. direct business loan arrangement D. more restrictive covenants than publicly issued debt E. lower distribution costs than a public issue

E. avoid rejecting positive NPV projects to increase dividends or buyback shares

Which one of these is a characteristic of a sensible payout policy? A. over time pay out half of all free cash flows B. set the current regular dividend consistent with a 100 percent payout ratio C. increase regular dividends to distribute transitory cash flow increases D. set the dividends high even if it means acquiring expensive external financing E. avoid rejecting positive NPV projects to increase dividends or buyback shares

C. Dividends are frequently taxed as ordinary income.

Which one of these is a con of paying dividends? A. Paying dividends reduces agency costs when excess cash is available. B. Dividends can be used to signal a firm's optimistic outlook. C. Dividends are frequently taxed as ordinary income. D. Dividends appeal to income-seeking investors. E. Managers can pay dividends to keep cash from bondholders.

C. furnishing financial statements to the firm's lenders

Which one of these is most related to a positive covenant? A. limiting the amount of the firm's dividends B. avoiding a merger while a debt remains unpaid C. furnishing financial statements to the firm's lenders D. not issuing any additional long-term debt E. ot selling any major assets without lender approval

C. bondholders

Which one of these parties holds a marketable claim on a firm's assets? A. customers B. employees C. bondholders D. Internal Revenue Service E. state tax authorities

E. Much of the dividend income paid in the U.S. is related to a small number of firms.

Which one of these statements is correct? A. In the U.S. economy, dividends are quite insignificant. B. Over the last few decades, the percentage of U.S. firms paying dividends has increased. C. The tax law change in May 2003 is cited as one reason why the percentage of dividend payers has decreased in the U.S. D. Dividends are more tax-advantaged than capital gains. E. Much of the dividend income paid in the U.S. is related to a small number of firms.

E. Firms should never give up a positive NPV project to increase a dividend.

Which one of these statements is true? A. Dividends are irrelevant. B. Shareholders are unable to personally adjust the dividend policy set by the firm. C. According to Miller and Modigliani, a firm should alter its investment policy whenever a change is made in its dividend policy. D. Dividend policy is relevant. E. Firms should never give up a positive NPV project to increase a dividend.

C. Private placements generally have longer maturities than term loans.

Which one of these statements related to debt financing is correct? A. Debt issues of any type, unlike equity issues, do not require SEC registration. B. Commercial banks specialize more in private placements than in term loans. C. Private placements generally have longer maturities than term loans. D. The majority of debt issues are public issues. E. Public debt issues generally have more restrictive covenants than private issues.

D. taxes, asset types, and uncertainty of operating income

Which three factors are generally considered to be the most important when determining a target debt-equity ratio? A. taxes, asset types, and inflation rate B. asset types, current operating income, and inflation rates C. taxes, current operating income, and future operating income D. taxes, asset types, and uncertainty of operating income E. interest rates, inflation rates, and tax rates

B. straight bonds

Which type of offering will generally incur the lowest direct issue costs as a percentage of gross proceeds? A. small-sized IPO B. straight bonds C. SEO D. large-sized IPO E. convertible bonds

B. dilution of stock price per share

Which type(s) of dilution are relevant to a firm's shareholders when the firm's shares are issued with rights? A. dilution of percentage ownership B. dilution of stock price per share C. dilution of both book value per share and earnings per share D. dilution of both percentage ownership and book value per share E. dilution of both stock price per share and earnings per share

D. stock split.

Wydex, Inc. stock is currently trading at $82 a share. The firm feels that its primary clientele can afford to spend between $2,000 and $2,500 to purchase a round lot of 100 shares. The firm should consider a: A. reverse stock split. B. liquidating dividend. C. stock dividend. D. stock split. E. special dividend.

A. $362.80

You own 200 shares of Loner, Inc. stock. The company announced that it will be issuing a dividend of $.20 a share one year from today followed by a final liquidating dividend of $1.60 a share two years from today. If you can earn 7 percent on your funds, what will be the value of your total investment income in two years if you do not want to receive any funds until then? A. $362.80 B. $266.67 C. $302.30 D. $348.04 E. $247.78

D. $.67

You own 200 shares of a stock valued at $21 a share. Each share is entitled to one right. A rights offer grants you the option of obtaining one new share for two rights plus $17. What is the value of each right? A. $1.33 B. $1.25 C. $.33 D. $.67 E. $1.67

B. $29.64

You own 300 shares of Abco stock. The firms plans on issuing a dividend of $2.10 a share one year from today and then issuing a final liquidating dividend of $36.45 a share two years from today. Your required rate of return is 14.5 percent. Ignoring taxes, what is the value of one share of this stock to you today? A. $33.93 B. $29.64 C. $26.62 D. $27.80 E. $31.05

C. $330

You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased another 100 shares and then on July 22st you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5th to holders of record on Friday, July 23rd. The dividend is payable on July 31st. How much dividend income will you receive on July 31st from ABC? A. $0 B. $220 C. $330 D. $440 E. $550