fin 362

red herring waiting period

A preliminary prospectus, called a --------, is distributed during the --------

green shoe provision

Allows the syndicate to purchase an additional 15% of the issue from the issuer Allows the issue to be oversubscribed

term loans

Direct business loans from commercial banks, insurance companies, etc. Maturities 1 - 5 years

As the degree of sensitivity of a project to a single variable rises, the

Greater is the importance of accurately predicting the value of that variable.

JLK is a partnership that was formed two years ago for the purpose of creating new fad items and distributing them directly to consumers. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?

IPO

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?

IRR and net income

firm commitment underwriting

Issuer sells entire issue to underwriting syndicate

regulation D

May issue shares to investors under SEC regulation ----- governing private placements.

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

144

Owners of shares in privately-held corporations may resell those shares under SEC rule -----, if certain specified conditions are met

lockup agreements

Restriction on insiders that prevents them from selling their shares of an IPO for a specified time period (SEC Rule 144)

private placements

Similar to term loans but with longer maturity

firm commitment underwriting

The most common form of underwriting

effective date of registration

The price is determined on the --------------

dutch auction

Underwriter accepts a series of bids that include number of shares and price per share The price that everyone pays is the highest price that will result in all shares being sold

Formulate method used to issue securities Price the securities Sell the securities Price stabilization by lead underwriter

Underwriter duites 4

best effort underwriting

Underwriter must make their "best effort" to sell the securities at an agreed-upon offering price The company bears the risk of the issue not being sold

Changes in the net working capital requirements: a Can affect the cash flows of a project every year of the project's life. b Only affect the initial cash flows of a project. c Only affect the initial and final cash flows of a project. d Are generally excluded from project analysis due to their irrelevance to the total project. e Are excluded from the analysis as long as they are recovered when the project ends.

a

Mobile Units recently offered 30,000 new shares of stock for sale. The underwriters sold a total of 32,000 shares to the public at a price of $14.50 a share. The additional 2,000 shares were purchased in accordance with which one of the following? a Green shoe provision b Red herring provision c Quiet provision d Lockup agreement e Post-issue agreement

a

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? a Loan obtained to finance the project b Initial investment in inventory to support the project c Annual depreciation tax shield d Aftertax salvage value e Net working capital recovery

b

The minimum price that will provide your target rate of return.

bid price

Given the following, which feature identifies the most desirable level of output for a project? a Operating cash flow equal to the depreciation expense. b Payback period equal to the project's life. c Discounted payback period equal to the project's life. d Zero IRR. e Zero operating cash flow.

c

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? a Storing supplies in the same space currently used for materials storage. b Utilizing the basket manager to oversee wreath production. c Hiring additional employees to handle the increased workload should the firm accept the wreath project. d Researching the market to determine if wreath sales might be profitable before deciding to proceed. e Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt.

c

Which one of the following best describes the concept of erosion? a Expenses that have already been incurred and cannot be recovered. b Change in net working capital related to implementing a new project. c The cash flows of a new project that come at the expense of a firm's existing cash flows. d The alternative that is forfeited when a fixed asset is utilized by a project. e The differences in a firm's cash flows with and without a particular project.

c

Which one of the following statements concerning dilution is correct? a Dilution of percentage ownership occurs whenever an investor fully participates in a rights offer. b Market value dilution increases as the net present value of a project increases. c Market value dilution occurs when the net present value of a project is negative. d Neither book value dilution nor market value dilution has any direct bearing on individual shareholders. e Book value dilution is the cause of market value dilution.

c

computes the annual cash flows for capital budgeting purposes

cash flow from assets

The depreciation tax shield is best defined as the: a Amount of tax that is saved when an asset is purchased. b Tax that is avoided when an asset is sold as salvage. c Amount of tax that is due when an asset is sold. d Amount of tax that is saved because of the depreciation expense. e Amount by which the aftertax depreciation expense lowers net income.

d

Which of the following are inversely related to variable costs per unit? a Sales quantity and sales price. b Net profit per unit and sales quantity. c Operating cash flow and sales quantity. d Operating cash flow per unit and contribution margin per unit. e Contribution margin per unit and marginal costs.

d

Which of the following variables will be forecast at their highest expected level under a worst case scenario? a Fixed costs and salvage value. b Variable costs and sales price. c Fixed costs and sales price. d Fixed and variable costs. e Initial cost and salvage value.

d

Which one of the following should not be included in the analysis of a new product? a Increase in accounts payable for new product inventory purchases. b Reduction in sales for a current product once the new product is introduced. c Market value of a machine owned by the firm which will be used to produce the new product. d Money already spent for research and development of the new product. e Increase in accounts receivable needed to finance sales of the new product.

d

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

decrease

Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to:

dilution

Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock? a Pre-issue date. b Aftermarket date. c Declaration date. d Holder-of-record date. e Ex-rights date.

e

Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the: a Maximum possible level of production. b Minimum possible level of production. c Financial break-even point. d Accounting break-even point. e Cash break-even point.

e

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: a Longest life. b Highest annual operating cost. c Lowest annual operating cost. d Highest equivalent annual cost. e Lowest equivalent annual cost.

e

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

equivalent annual cost

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

financial break even

The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:

gross spread

syndicates

group of investment bankers that market the securities and share the risk associated with selling the issue

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:

hard rationing

The date on which a shareholder is officially listed as the recipient of stock rights is called the:

holder of record date

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale?

marginal cost

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the firm is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?

rights offer

accounting break even

sales volume at which NI = 0

financial break even

sales volume at which NPV = 0

cash break even

sales volume at which OCF = 0

Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this?

shelf registration

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

soft rationing

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

sunk

costs that have accrued in the past

sunk costs

Direct business loans typically ranging from one to five years are called:

term loans