MBA 702 - Financial Management Test 3 Study Guide

The ex-dividend date is defined as _____ business day(s) before the date of record.

2

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:

2 years

Which one of these will increase a company's after tax cost of debt?

A decrease in the company's tax rate

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 reduction in the risk-free rate

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 the financial distress costs is called:

A static theory of capital structure

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

Business Risk

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?

Cost of equity

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

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting?

Dutch auction

Jones & Co. recently went public an received $23.07 a share of 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?

Firm commitment

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

General cash offer

Mobile Unites 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 shared were purchased in accordance with which one of the following?

Green Shoe provision

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?

Interest tax shield

Which one of these describes an exception to the registration filing requirement of the SEC?

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 tot he company's capital structure?

M&M Proposition I, no tax

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?

Percentage ownership dilution

All of the following are supporting arguments in favor of IPO underpricing except which one?

Provides better returns to issuing firms

Which one of the following is a preliminary prospectus?

Red herring

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?

Rights offer

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The firm plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this?

Shelf registration

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

Special dividend

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

Stock repurchase

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

Stock split

Which one of the following is a key goal of the aftermarket period?

Supporting the market price for a new securities issue

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

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

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

What is a prospectus?

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

Underwriters generally:

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

The dividend market is in equilibrium when:

all clienteles are satisfied

With Dutch auction underwriting:

all successful bidders pay the same price per share

The subjective approach to project analysis:

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

A company's current cost of capital is based on:

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 as the ________ effect.

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:

cost of debt

The optimal capital structure has been achieved when the:

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

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:

declaration date

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 be best defined as a:

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:

increase the average risk level of the company over time

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

indirect bankruptcy

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:

is dependent upon a reliable estimate of the market risk premium

A stock repurchase program

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

A company's weighted average cost of capital:

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 both value of that company's marketed claims.

A firm should select the capital structure that:

maximizes the value of the firm

Existing shareholders:

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

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.

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.

quiet

The cost of preferred stock is computed the same as the:

rate of return on a perpetuity

The Securities and Exchange Commission:

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

The interest tax shield is a key reason why:

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

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:

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):

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:

weighted average cost of capital

M&M Proposition I with tax implies that the:

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

The value of a firm is maximized when the:

weighted average cost of capital is minimized