Fundamentals of Corporate Finance, Chapter 14 15 20
Which of the following statements is FALSE?
. The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When investors diversify their holdings, the equity holders of the corporation become more concentrated
What is the maximum maturity of commercial paper?
270 days
Which of the following statements regarding lines of credit is FALSE?
A. The line of credit agreement may also stipulate that at some point in time the outstanding balance must be zero. This policy ensures that the firm does not use the shortminus−term financing to finance its longminus−term obligations. B. The line of credit may be uncommitted, meaning it is an informal agreement that does not legally bind the bank to provide the funds. C. A revolving line of credit with no fixed maturity is called evergreen credit. D. A revolving line of credit is an uncommitted line of credit that involves an informal agreement from the bank for a longer period of time, typically two to three years. D
underwriters generally:
Accept the risk of selling the new securities in exchange for the gross spread
Which one of the following increases cash?
Accepting credit from a supplier
Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as
Accounts receivable financing
With Dutch auction underwriting:
All successful bidders pay the same price per share
What is the term used for a shortminus−term, unsecured debt sold by a large company to investors?
Commercial Paper
Money deposited by a borrower with the bank in a low or non interest bearing account as a condition of a loan agreement is called a
Compensating balance
Which of the following is a committed line of credit with no fixed maturity?
Evergreen credit
Commercial paper is usually a more expensive source of funds than a shortminus−term bank loan
False
In a best−efforts IPO, the underwriter guarantees that all stock will be sold.
False
The announcement of an SEO usually raises a stock's price.
False
True or False When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs.
False
True or false regarding a call provision? The call price is generally set at or below, and expressed as a percentage of, the bond's face value.
False
True or false? A firm's need for outside capital usually ends at the IPO.
False
D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?
Firm commitment
Which of the following best describes the agreement where all of a firm's inventory is used to secure a loan?
Floating lien
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
With firm commitment underwriting, the issuing firm:
Knows upfront the amount of money it will receive from the stock offering
A compensating balance
May be required even if a firm never borrows funds
Why do the issuers of bonds not seek to minimize the strength and numbers of covenants in a bond agreement?
More covenants lower the interest rate investors will require to buy the bond
Why do the issuers of bonds not seek to minimize the strength and number of covenants in a bond agreement?
More covenants lower the interest rate investors will require to buy the bond.
Alberto currently owns 2500 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
What is a seasoned equity offering?
Sale of newly issued equity shares by a firm that is currently publicly owned
Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0
Selling inventory at a profit on credit
To purchase a share in a rights offering, an existing shareholder generally just needs to:
Submit the required number of rights along with the subscription price
In which of the following situations would the yield to worst for a certain bond be that bonds yield to call?
The bond's coupon payments are high relative to market yields; The likelihood of the bond being called is high
Which of the following statements is FALSE?
The process of selling stock to the public for the first time is called a seasoned equity offering (SEO).
Which of the following best describes a firm commitment IPO?
The underwriter purchases the entire issue at a small discount and then resells it at the offer price.
A short−term financial plan tracks a firm's cash balance and new and existing short−term financing, enabling managers to forecast shortfalls and plan to fund them in the least costly manner
True
The accounts receivable and inventory of a firm typically are used as collateral when issuing shortminus−term secured financing.
True
The firm commitment process is the most common practice for IPOs in the United States.
True
The interest on commercial paper is typically paid by selling it at an initial discount.
True
The main advantages for a firm in going public are greater liquidity and better access to capital.
True
Assume all else held constant. If you pay your suppliers five days sooner then
You may require additional funds from other sources to fund the cash cycle
A petroleum exploration company takes a shortminus−term bank loan in order to finance the purchase of several truckminus−mounted, vibroseis shakers, which have unexpectedly come onto the market at a good price. Once the purchase is made, the company will obtain longminus−term financing. Which of the following best describes the shortminus−term loan the company has taken?
a bridge loan
In which of the following loans can inventory NOT be used as collateral?
a factoring arrangement
In terms of public offerings of bonds, what is an indenture?
a formal contract that specifies a firm's obligations to the bondholders
In terms of public offerings of bonds, what is an indenture?
a formal contract that specifies a firm's obligations to the bondholders
Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy, holders of this debt may claim the property held by Athelstone Realty. Which of the following best describes this type of corporate debt?
a mortgage bond
Nature's Bounty, an organic seed company, is seeking to grow from a small company selling seeds in local markets into a company that sells seeds across several states. The funding for this expansion comes from a wealthy individual who uses his considerable inherited wealth to fund a variety of ecominus−friendly businesses. Which of the following best describes the individual's relationship with Nature's Bounty?
an angel investor
Which of the following terms best describes a loan where a larger line of credit or lower interest rate has been obtained by providing collateral to back that loan?
an asset backed line of credit
The Ontario Teachers' Pension Plan is a pension fund for public school teachers in the province of Ontario. It has a large and diverse portfolio of investments, both in Canada and internationally, and had net assets in December 2007 of C$108.5 billion. Which of the following best describes the Ontario Teachers' Pension Plan?
an institutional investor
What is a call provision?
an option to the issuer to repurchase the bonds at a predetermined price
Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a
cash budget
Which of the following best describes the agreement where a firm sells receivables to a lender and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period, with the provision that the lender will receive payment from the borrower if the customers default on their payments?
factoring of accounts receivable with recourse
When a callable bond sells at a premium, the likelihood of a call is ________ and the yield to worst is the yield to ________.
high, call
Which of the following is an advantage of a public bond issue over private placement?
it is freely tradable on the bond market
What kind of corporate dent must be secured by real property?
mortgage bonds
As part of the registration statement, the preliminary prospectus circulates to investors before the stock is offered. This preliminary prospectus is also called a(n)
red herring
What is a seasoned equity offering?
the issuing of shares by a company at a time after its IPO
What is a bond's seniority?
the bondholder's priority in claiming assets in the event of default
Convertible bonds have a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock.
true
