FIN 850 - Exam 2
The only reason why the price would fall on a corporate bond is if market interest rates increase.
False
In general, the capital structures used by non-financial U.S. firms:
vary significantly across industries.
Homemade leverage is:
the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.
The basic lesson of the M&M theory is that the value of a firm is dependent upon:
the total cash flow of the firm
13. A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date?
$1,050
Individuals who continually monitor the financial markets seeking mispriced securities:
make the markets increasingly more efficient.
Private equity firms comprise a relatively insignificant portion of the American economy.
False\
Which of the following statements regarding preferred stock is true? A. Holders of preferred stock have the same voting rights as common stockholders. B. Preferred stock dividend payments are a deductible expense for corporate tax purposes. C. Almost all public corporations are at least partly financed with preferred stock.
None
After issue, the market price of a fixed-rate bond can differ substantially from its par value.
True
Bond investors should be more concerned with real returns than with nominal returns.
True
Which of the following statements regarding interest tax shields is correct?
Taxable income is reduced by the amount of the interest on a firm's debt.
When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.
True
In some instances, additional debt financing can encourage managers to act more in the interests of owners.
True
Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.
True
Shelf registration is possible for both debt and equity issues.
True
The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.
True
When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?
ABC's cash flows from operations are less volatile than XYZ's.
According to the pecking order theory of capital structure, why do firms avoid issuing equity
Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall
Which of the following securities has a purely fixed claim against a firm's cash flows?
Bonds
Which of the following securities has a purely residual claim against a firm's cash flows?
Common Stock
Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2013 period)?
Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills
Mike just purchased a bond which pays $40 every six months in interest. The $40 interest payment is also called the:
Coupon
Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios III. A range of earnings chart and proximity of expected EBIT to the breakeven value
I and III
Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling III. Management incentives
I and III only
Financial leverage: II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners.
II, III and IV only
Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? III. The information has no bearing on the value of the firm IV. The information was anticipated
III and IV only
Which one of the following statements is true? A. Debt instruments offer residual claims to future cash payouts. B. Bonds with call provisions will have lower coupon rates than otherwise identical bonds. C. Bondholders enjoy a direct voice in company decisions. D. Bonds are low-risk investments that do well in inflationary periods. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation.
None of the above
Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the:
Par value
Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will:
increase the variability in earnings per share
The best financing choice is the one that:
maximizes expected cash flows
Which of the following is NOT a likely financing policy for a rapidly growing business?
Borrow funds rather than limit growth, thereby limiting growth only as a last resort.
In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".
False
The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value.
False
Which one of the following statements is true?
Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.
Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling III. Tax benefits
I and III only
The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt
I, II, III, and IV
Which of the following statements related to market efficiency tends to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information.
I, II, and III only
According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. IV. A firm's capital structure is dictated by its need for external financing.
I, II, and IV only
Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income.
I, II, and IV only
The interest tax shield has no value when a firm has: I. no taxable income. III. zero debt. IV. no leverage.
I, III, and IV only
Which of the following factors favor the issuance of equity in the financing decision? II. Distress costs IV. Financial flexibility
II and IV only
Which of the following would not be considered a cost of financial distress?
Lack of interest tax shield
Which one of the following statements is false?
The design of financial instruments is greatly constrained by law and regulation.
Which of the following is NOT an implication of the pecking order theory of capital structure?
More-profitable firms (all else equal) should have higher debt ratios.
Which of the following variables does NOT affect the value of a stock option?
The predicted future price of the underlying stock
Debt financing results in lower after-tax earnings relative to equity financing
True
If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.
True
In a strong-form efficient market, insider trading is not profitable.
True