Final Exam- Dr. Joey Choi LSUS- FIN701

The ex-dividend date is defined as __________ business day(s) prior to the date of record

2 business days

Which one of the following is a direct result of a two-for-one stock split?

A 50 percent decrease in the par value per share

Which one of these will increase a company's after tax cost of debt? A) A decrease in the company's debt-equity ratio B) A decrease in the company's tax rate C) An increase in the credit rating of the company's bonds D) An increase in the company's beta E) A decrease in the market rate of interest

A decrease in the company's tax rate.

Which one of the following statements related to cash dividends is correct?

A dividend is never a liability of the issuer until it has been declared

What is a prospectus? A) A letter issued by the SEC authorizing a new issue of securities 8) A report stating that the SEC recommends a new security to investors C) A letter issued by the SEC that outlines the changes required for a registration statement to be approved D) A document that describes the details of a proposed security offering along with relevant information about the issuer E) An advertisement in a financial newspaper that describes a security offering

A document that describes the details of a proposed security offering along with relevant information about the issuer

Which one of the following is the equity risk that is most related to the daily operations of a firm?

Business risk

Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?

Date of record

Which one of the following is a marketed claim against the cash flows of a company?

Dividend payment to shareholders

Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this? A) Best efforts B) Shelf C) Oversubscribed D) Private placement E) Finn commitment

Firm commitment

Which one of these describes an exception to the registration filing requirement of the SEC? A) Loans that mature in one year or less B) Issues that have an approved prospectus C) Loans of$ IO mill ion or less D) Issues of less than $5 million E) Issues that have received an approved letter of comment

Issues of less than $5 million

Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries declared a dividend on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information?

Kate is entitled to the dividend but Ted is not

Which one of the following states that the value of a company is unrelated to the company's capital structure?

M&M proposition I, no tax

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this? A) Standby registration B) Shelf registration C) Regulation A registration D) Regulation Q registration E) Private placement registration

Shelf Registration

Which type of dividend is considered to be a one-time event that will not be repeated?

Special dividend

What is the information content effect?

The financial market's reaction to a change in the amount of a company's dividend

Which one of the following statements is correct in relation to M&M Proposition II, without taxes?

The required return on assets is equal to the weighted average cost of capital

Bailey's decided on Friday, March 7, to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?

Thursday, March 20

United Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?

Wednesday, October 29

A one-for-four reverse stock split will increase:

a $1 par value to $4

The dividend market is in equilibrium when:

all clienteles are satisfied

The interest tax shield is a key reason why:

the net cost of debt is generally less than the cost of equity

The value of a firm is maximized when the:

weighted average cost of capital is minimized

All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. A) A reduction in the dividend amount B) An increase in the dividend amount C) A reduction in the market rate of return D) A reduction in the firm's beta E) A reduction in the risk-free rate

A reduction in the risk-free rate.

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith Inc. What is the return that these individuals require on this investment called? A) Dividend yield B) Cost of equity C) Capital gains yield D) Cost of capital E) Income return

Cost of Equity

What is an issue of securities that is offered for sale to the general public on a direct cash basis called? A) Best efforts underwriting B) Finn commitment underwriting C) General cash offer D) Rights offer E) Herring offer

General Cash offer

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

Indirect Bankruptcy

All of the following are supporting arguments in favor of IPO underpricing except which one? A) Helps prevent the "winner's curse" B) Rewards institutional investors who share their market value opinions C) Reduces potential lawsuits against underwriters D) Diminishes underwriting risk E) Provides better returns to issuing firms

Provides better returns to issuing firms

Which one of the following is a preliminary prospectus? A) Tombstone 8) Green shoe C) Registration statement D) Rights offer E) Red herring

Red herring

Which one of the following does not affect the total equity of a company but does increase the number of shares outstanding?

Stock Split

Underwriters generally: A) pay a spread to the issuing firm. B) provide only best efforts underwriting in the U.S. C) accept the risk of selling the new securities in exchange for the gross spread. D) market and distribute an entire issue of new securities within their own firm. E) pass the risk of unsold shares back lo the issuing firm via a firm commitment agreement.

accept the risk of selling the new securities in exchange for the gross spread

The subjective approach to project analysis: A) is used only when a firm has an al l-equity capital structure. B) uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Fim1 Y. C) assigns discount rates to projects based on the discretion of the senior managers of a firm. D) allows managers to randomly adjust the discount rate assigned to a project once the project's standard deviation has been determined. E) applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

assigns discount rates to projects based on the discretion of the senior managers of a firm

A company's current cost of capital is based on: A) only the return required by the company's current shareholders. B) the current market rate of return on equity shares. C) the weighted costs of all future funding sources. D) both the returns currently required by its debtholders and stockholders. E) the company's original debt-equity ratio.

both the returns currently required by its debtholders and stockholders

The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to by which one of the following terms?

clientele

You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the:

company is earning just enough to pay for the cost of the debt

Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the: A) compound rate. B) current yield. C) cost of debt. D) capital gains yield. E) cost of capital

cost of debt.

A $.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business becomes a liability of the company on the:

date-of-record

The optimal capital structure has been achieved when the:

debt-equity ratio results in the lowest possible weighted average cost of capital

A reverse stock split is defined as a(n)

decrease in the number of shares outstanding without affecting total owners' equity

Financial risk is:

dependent upon a company's capital structure

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as ________ costs.

direct bankruptcy

Assume you are reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT). The steeper the slope of the plotted line the:

greater the sensitivity of EPS to changes in EBIT

A syndicate can best be defined as a: A) venture capitalist. 8) group of attorneys providing services for an LPO. C) block of investors who control a firm D) bank that loans funds to finance the start-up of a new company. E) group of underwriters sharing the risk of selling a new issue of securities.

group of underwriters sharing the risk of selling a new issue of securities.

The business risk of a company:

has a positive relationship with the company's cost of equity.

If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to: A) accept all positive net present value projects. B) increase the average risk level oflhe company over time. C) reject all high-risk projects. D) reject all negative net present value projects. E) favor low-risk projects over high-risk projects.

increase the average risk level of the company over time

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1000. Which one of the following terms is used to describe this tax savings?

interest tax shield

A stock repurchase program:

is essentially the same as a cash dividend program provided there are no taxes or other costs

A firm should select the capital structure that:

maximizes the value of the firm

Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation? A) Overallotment B) Percentage ownership dilution C) Green Shoe allocation D) Red herring allotment E) Abnormal event

percentage ownership dilution

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the___________ approach. A) subjective risk B) pure play C) divisional cost of capital D) capital adjustment E) security market line

pure play

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _______________ period. A) auction B) quiet C) lockup D) Green Shoe E) red

quiet

The cost of preferred stock is computed the same as the: A) pretax cost of debt. B) rate of return on an annuity. C) aftertax cost of debt. D) rate of return on a perpetuity. E) cost of an irregular growth common stock

rate of return on a perpetuity.

The proposition that a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

the static theory of capital structure

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called: A) red herrings. B) tombstones. C) Green Shoes. D) registration statements. E) cash offers.

tombstones

Executive tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n): A) aflermarket specialist. B) venture capitalist. C) underwriter. D) seasoned writer. E) primary investor.

underwriter

The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the company's capital structure is called the: A) reward-to-risk ratio. B) weighted capital gains rate. C) structured cost of capital. D) subjective cost of capital. E) weighted average cost of capital.

weighted average cost of capital

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent: A) 3 months B) 6 months. C) 180 days. D) 2 years. E) 5 years.

2 years

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting? A) Dutch auction B) Best efforts C) Public rights D) Private placement E) Market commitment

Dutch Auction

Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 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

Green Shoe provision

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company 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? A) Best efforts offer B) Firm commitment offer C) General cash offer D) Rights offer E) Priority offer

Rights offer

HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?

Stock repurchase

Which one of the following is a key goal of the aftermarket period? A} Collecting the largest number of Dutch auction bids as possible B) Determining a fair offer price C) Supporting the market price for a new securities issue D) Establishing a broad-based underwriting syndicate E) Distributing red herring.~ to as many potential investors as possible

Supporting the market price for a new securities issue

With Dutch Auction underwriting: A) each winning bidder pays the minimum price offered by any bidder. B) all successful bidders pay the same price per share. C) all bidders receive at least a portion of the quantity for which they bid. D) the selling firm receives the maximum possible price for each security sold. E) the bidder for the largest quantity receives the first allocation of securities

all successful bidders pay the same price per share

Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model (CAPM) to determine its cost of equity. As a result, the company's cost of equity: A) is affected by the firn1's rate of growth projections. B) implies that the firn1 pays out all of its earnings to its shareholders. C) is dependent upon a reliable estimate of the market risk premium. D) would be unaffected if the dividend discount model were applied instead. E) will be unaffected by changes in overall market risks.

is dependent upon a reliable estimate of the market risk premium.

A company's weighted average cost of capital: A) is equivalent to the atlertax cost of the outstanding liabilities. B) should be used as the required return when analyzing any new project. C) is the return investors require on the total assets of the firm. D) remains constant when the debt-equity ratio changes. E) is unaffected by changes in corporate tax rates

is the return investors require on the total assets of the firm

The fact that flotation costs can be significant is an argument for:

maintaining a low dividend policy and rarely issuing extra dividends.

The optimal capital structure of a company:

maximizes the value of that company's marketed claims

Existing shareholders: A) may or may not have a pre-emptive right to newly issued shares. B) must purchase new shares whenever rights are issued. C) are prohibited from selling their rights. D) are generally well advised to let the rights they receive expire. E) can maintain their proportional ownership positions without exercising their rights.

may or may not have a pre-emptive right to newly issued shares

The Securities and Exchange Commission: A) verifies the accuracy of the information contained in the prospectus. B) publishes red herrings on prospective new security offerings. C) examines the prospectus during the Green Shoe period. D) reviews registration statements to ensure they comply with current laws and regulations. E) determines the final offer price once they have approved the registration statement.

reviews registration statements to ensure they comply with current laws and regulations

M&M Proposition I with tax implies that the:

weighted average cost of capital decreases as the debt-equity ratio increases