Corp Finance Final

Green Shoe options generally last ____ days and benefit ____. 30; the underwriting syndicate 30; the issuer 60; the underwriting syndicate 60; the issuer 90; both the issuer and the underwriting syndicate

30; the underwriting syndicate

Which method(s) is (are) most applicable if a project's debt level is known over the life of the project? FTE Either APV or FTE APV WACC Either FTE or WACC

APV

Which characteristic does not apply to Eurobonds? Issued in multiple countries Always denominated in euros Always denominated in a single currency Commonly traded from London Generally denominated in the issuer's home currency

Always denominated in euros

One company wishes to acquire another. Which one of the following does not require a formal vote by the shareholders of the acquired firm? A horizontal acquisition of assets A merger A consolidation A vertical acquisition of assets An acquisition of stock

An acquisition of stock

Which statement concerning the net present value (NPV) of an investment or a financing project is correct? An investment project that has positive cash flows for every time period after the initial investment should be accepted. Any type of project with greater total cash inflows than total cash outflows, should always be accepted. A financing project should be accepted if, and only if, the NPV is exactly equal to zero. An investment project should be accepted only if the NPV is equal to the initial cash flow. Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Bonds that grant the issuer the right to extinguish the debt prior to maturity are referred to as which type of bond? Callable bond Put bond Debenture Subordinated bond

Callable bond

Which one of the following is not empirically correct? Debt ratios in most countries are considerably less than 100 percent. The capital structure of a firm can vary significantly over time. Capital structures are fairly constant across industries. Some firms use no debt. Debt levels across industries vary widely.

Capital structures are fairly constant across industries.

Which one of the following is not a reason why firms choose repurchases rather than dividends? Offset dilution Conserve cash Provide shareholders with a tax advantage Increase the value of existing stock options Provide flexibility

Conserve cash

When computing the weighted average cost of capital, which of these are adjusted for taxes? Both the cost of equity and the cost of preferred stock Cost of debt The costs of debt and preferred stock Cost of equity Cost of preferred stock

Cost of debt

The beta of a security is calculated as: (_____ of a security's return with the return on the market portfolio/_______). Covariance; Variance of the security return Variance; Covariance of the security return Covariance; Variance of the market return Covariance; Standard deviation of the market return Variance; Covariance of the market return

Covariance; Variance of the market return

Which one of the following statements is true? Debt increases the possibility of financial distress. Payments of both interest and dividends are tax-deductible as business expenses. Bondholders are generally granted voting rights equal to those of common shareholders. Unpaid common stock dividends can force a firm into liquidation. Debt holders have a residual claim on a firm's assets.

Debt increases the possibility of financial distress.

Which one of the following is a direct, rather than an indirect, cost of financial distress? Key employee leaving for another job due to concerns over job security given the company's financial status Loss of customers due to concerns the company will close Fees paid to financial advisors related to bankruptcy matters Loss of a key supplier due to late payments to that supplier Money spent to send a mailing to customers dispelling any and all financial distress concerns about the company

Fees paid to financial advisors related to bankruptcy matters

Wood Crafts has expended almost all its start-up funds and is seeking venture capital to begin manufacturing. Which type of financing is it seeking? Seed money financing First-round financing Mezzanine financing Second-round financing Bridge financing

First-round financing

Which of these will increase the value of a call option? I. An increase in the market value of the underlying asset II. An increase in the option's strike price III. A decrease in the market value of the underlying asset IV. A decrease in the option's strike price II and III only I and II only I and IV only I only II only

I and IV only

Which one of the following statements is true? Rational investors are likely to infer a firm is more valuable when its debt level declines. A successful firm will probably be all-equity financed. Investors will generally view an increase in debt as a positive sign for the firm's future value. A firm with low anticipated profits will likely take on a high level of debt. Rational firms raise debt levels when profits are expected to decline.

Investors will generally view an increase in debt as a positive sign for the firm's future value.

Leslie purchased 100 shares of GT stock on Monday July 25th. Marti purchased 100 shares of GT stock on Wednesday July 27th. GT declared a dividend on Monday June 20th to shareholders of record on Friday July 29th that is payable on Tuesday August 16th. Which one of the following statements concerning the dividend paid on Tuesday August 16th is correct given this information? Both Marti and Leslie are entitled to the dividend. Marti is entitled to the dividend but Leslie is not. Neither Leslie nor Marti are entitled to the dividend. Both Marti and Leslie are each entitled to one-half of the dividend amount. Leslie is entitled to the dividend but Marti is not.

Leslie is entitled to the dividend but Marti is not.

Which group has the ultimate control over a corporation? Bondholders Shareholders Chief executive officer Board directors

Shareholders

Based on the concept of the clientele effect, which one of these combinations correctly aligns an investor group with its preferred type of stocks? High-tax-bracket individuals; high-payout stocks High-tax-bracket individuals; low-to-medium payout stocks Tax-free institutions; medium-payout stocks Corporations; low-to-medium payout stocks Low-tax-bracket individuals; zero-to-low payout stocks

Tax-free institutions; medium-payout stocks

Which three factors are generally considered to be the most important when determining a target debt-equity ratio? Asset types, current operating income, and inflation rates Taxes, asset types, and inflation rate Taxes, asset types, and uncertainty of operating income Interest rates, inflation rates, and tax rates Taxes, current operating income, and future operating income

Taxes, asset types, and uncertainty of operating income

Which one of the statements is correct? The discount rate for levered equity is unaffected by the debt-equity ratio The cost of levered equity has nothing to do with beta The cost of equity for an all-equity firm is less than the cost of equity for a levered firm The weighted average cost of capital is equal to B/S * (Rs) * (1 - Tc)

The cost of equity for an all-equity firm is less than the cost of equity for a levered firm

A classified board is: a board where only a portion of the directors are elected in any one year. the inclusion a super majority provision to prevent a small number of directors from exerting total control over the board's decisions. a communication network that identifies firms that are willing to be acquired a listing of criteria that a firm is seeking for a targeted purchase. a communication network that distributes resumes for potential board candidates.

a board where only a portion of the directors are elected in any one year.

The cost of capital used to compute the present value of a project should be the rate that can be earned on: the sponsoring firm's return on assets. the sponsoring firm's return on equity. the overall market portfolio. a riskless asset with a similar life span. a financial asset of comparable risk.

a financial asset of comparable risk.

MM Proposition II is the proposition that: the cost of equity is equivalent to the required return on the total assets of a levered firm. a firm's cost of equity capital is a positive linear function of the firm's capital structure. the cost of debt is inversely related to a firm's debt-equity ratio. supports the argument that the capital structure of a firm is irrelevant to the value of the firm. the cost of levered equity depends solely on the return on debt, the debt-equity ratio, and the tax rate.

a firm's cost of equity capital is a positive linear function of the firm's capital structure.

The increase in risk to shareholders when financial leverage is introduced is best evidenced by: a higher variability of EPS with debt than with all-equity financing. increased use of homemade leverage. decreasing earnings as EBIT increases. higher EPS as EBIT increases. the increase in taxes.

a higher variability of EPS with debt than with all-equity financing.

If a firm issues debt and includes protective covenants in the indenture then the firm's debt will probably be issued at _____ similar debt without the covenants. a slightly higher interest rate than an interest rate equal to that of a lower interest rate than a significantly higher interest rate than a variable interest rate rather than the fixed rate paid on

a lower interest rate than

Nu Tech is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all its available cash to fund its rapid growth. The market price of its stock is currently trading in the upper end of its preferred trading range. The firm could consider: a liquidating dividend. a stock dividend. an extra cash dividend. a reverse stock split. a cash distribution.

a stock dividend.

To calculate the adjusted present value, you should: divide the project's levered cash flow by the risk-free rate. add the additional effects of debt to the all-equity project value. multiply the additional effects of debt by the all-equity project value. divide the project's levered cash flow by the risk-adjusted rate. add the pretax cost of debt to the project's all-equity NPV.

add the additional effects of debt to the all-equity project value.

The weighted average cost of capital is determined by _____ the weighted average cost of equity. dividing the weighted average pretax cost of debt by dividing the weighted average aftertax cost of debt by adding the weighted average aftertax cost of debt to multiplying the weighted average aftertax cost of debt by adding the weighted average pretax cost of debt to

adding the weighted average aftertax cost of debt to

Conflicts of interest between stockholders and bondholders are known as: trustee costs. dealer costs. agency costs. financial distress costs. underwriting costs.

agency costs.

If you write a European call option, you: are obligated to buy the specified assets prior to the option's expiration. are obligated to sell the specified assets at the set price if the option is exercised. have the right to buy the specified assets at the set price at any time prior to the option's expiration. have the right to buy the specified assets at the set price only on the expiration date. have the right to sell the specified assets at the set price at any time up to and including on the expiration date.

are obligated to sell the specified assets at the set price if the option is exercised.

Assume a firm issued securities through an agreement where the investment bankers sold as many shares as possible at a fixed price. This issue would be classified as a: best-efforts cash offer. direct placement. Dutch auction. direct rights offer. firm commitment cash offer.

best-efforts cash offer.

Assume a merger of two levered firms produced no synergy. In this case, the: acquiring firm's shareholders would neither gain nor lose any value. combined shareholders would benefit at the expense of all debt holders. bondholders would probably benefit at shareholders' expense. shareholders and bondholders would fail to realize any benefits or losses. diversification effect would only benefit the acquired firm's shareholders.

bondholders would probably benefit at shareholders' expense.

In order to value a project which is not scale enhancing you typically need to: A. calculate the equity cost of capital using the risk-adjusted beta of another firm. B. double the firm's beta value when computing the project WACC. C. apply the firm's current WACC to the project's cash flows. D. discount the project's cash flows using the market rate of return since the project will diversify the firm's operations. E. replace the risk-free rate with the market rate of return when computing the project's discount rate.

calculate the equity cost of capital using the risk-adjusted beta of another firm.

The difference between an American option and a European option is that the American option: has an expiration date while the European option does not. is a right to buy while a European option is an obligation to buy. has a fixed exercise price while the European exercise price can vary within a small range. is written on 100 shares of the underlying security while the European option covers 1,000 shares. can be exercised at any time up to the expiration date while the European option can only be exercised on the expiration date.

can be exercised at any time up to the expiration date while the European option can only be exercised on the expiration date.

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the: security market line which shows that all investors will invest only in the riskless asset. capital market line which shows that all investors will only invest in the riskless asset. characteristic line which shows that all investors will invest in the same combination of securities. capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. security market line which shows that all investors will invest in the minimum variance portfolio.

capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.

The internal rate of return is: a better methodology than net present value when dealing with unconventional cash flows. more reliable than net present value whenever you are considering mutually exclusive projects. computed using a project's cash flows as the only source of inputs. equivalent to the discount rate that makes the net present value equal to 1.0. dependent on the interest rates offered in the marketplace.

computed using a project's cash flows as the only source of inputs.

The flow-to-equity (FTE) approach in capital budgeting is defined as the: dividends and capital gains that will be available to flow to shareholders of a firm. discounting of a project's unlevered cash flows to the equityholders at the WACC. discounting of a project's levered cash flows to the equityholders at the required return on equity. discounting of all project cash flows at the overall cost of capital.

discounting of a project's levered cash flows to the equityholders at the required return on equity.

Assume a levered firm plans to raise new capital to finance a project. To properly account for the flotation costs, the firm should: add the percentage of the flotation cost to the WACC when discounting the cash flows. increase the target weights of both debt and equity to account for the flotation percentage. divide the amount of project capital needed by (1 − Weighted average flotation cost). subtract the pretax flotation cost from the project's NPV. deduct the amount of the flotation cost from the cash flows for Year 1 of the project.

divide the amount of project capital needed by (1 − Weighted average flotation cost).

Ignoring taxes and all else held constant, the market value of a stock should decrease by the amount of the dividend on the: ex-dividend date. date of record. dividend declaration date. date of payment. day after the date of payment.

ex-dividend date.

All else held constant, the value of an American call decreases when the: stock price increases. exercise price increases. volatility of the price of the underlying stock increases. time to expiration increases. risk-free rate of return increases.

exercise price increases.

If you consider the equity of a firm to be an option on the firm's assets then the act of paying off debt is comparable to _____ on the assets of the firm. exercising an in-the-money call option purchasing a call option purchasing a put option selling a call option exercising an in-the-money put option

exercising an in-the-money call option

The CAPM has an advantage over DDM because the CAPM: ignores changes in the overall market over time. applies to firms that pay dividends. has no measurement risk. specifically considers a firm's rate of growth. explicitly adjusts for risk.

explicitly adjusts for risk.

A revolving bank line of credit: allows the borrower to determine the amount of credit to be granted. may only be offered for periods of one year or less. generally requires the borrower to borrow the entire credit line amount at some point in time. is generally free of charge until money is actually borrowed. generally involves a fee charged to the borrower on the unused portion of the revolver.

generally involves a fee charged to the borrower on the unused portion of the revolver.

In a merger or acquisition, a firm should be acquired if it: is a firm in the same line of business in which the acquirer has expertise. pays a large dividend which will provide a cash pass through to the acquirer. increases the firm's market share. is a firm in a totally different line of business which will diversify the firm. generates a positive net present value to the shareholders of the acquiring firm.

generates a positive net present value to the shareholders of the acquiring firm.

An in-the-money put option is one that: should not be exercised at any time. has an exercise price less than the underlying stock price. should not be exercised at expiration. expires today. has an exercise price greater than the underlying stock price.

has an exercise price greater than the underlying stock price.

Companies will generally have a ____ beta if their ____: high; sales are growing at a steady rate of increase. high; sales are high compared to other firms in their industry. low; stock price is relatively low. low; production costs are primarily fixed in nature. high; sales are highly dependent on the market cycle.

high; sales are highly dependent on the market cycle.

The ability of shareholders to undo the dividend policy of a firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is referred to as: homemade leverage. homemade dividends. capital structure irrelevancy. MM Proposition I. the perfect foresight model.

homemade dividends.

The two sources of value created by an LBO are: lower interest expenses and increased efficiency. lower tax and interest payments. lower taxes and lower dividends. increased efficiency and the interest tax shield. the tax benefit of debt and increased sales.

increased efficiency and the interest tax shield.

The market's reaction to the announcement of a change in the firm's dividend payout is referred to as the: MM Proposition II. MM Proposition I. information content effect. clientele effect. efficient markets hypothesis.

information content effect.

A project with the same level of risk as an all-equity firm should be accepted if the project's: expected rate of return exceeds the risk-free rate. expected rate of return exceeds the market rate of return. internal rate of return exceeds the firm's cost of equity capital. anticipated rate of return exceeds the firm's return on assets. internal rate of return is positive given this level of risk.

internal rate of return exceeds the firm's cost of equity capital.

The cost of preferred stock: should be adjusted for taxes when computing WACC. is set equal to the pretax cost of debt since it is a fixed income security. is ignored by all firms when computing WACC. is generally calculated using the overall firm's beta. is equal to the stock's dividend yield.

is equal to the stock's dividend yield.

From a tax-paying investor's point of view, a stock repurchase: creates a tax liability even if the investor does not sell any of the shares he owns. is more desirable than a cash dividend. has the same tax effects as a cash dividend. is more highly taxed than a cash dividend. is equivalent to a cash dividend.

is more desirable than a cash dividend.

The profitability index: rule states that the project with the lower index value should be accepted. is useful as a decision tool when investment funds are limited and all available funds are allocated. produces results which typically are difficult to comprehend. method is most commonly used when deciding between mutually exclusive projects of varying size. rule often results in decisions that conflict with the decisions based on the net present value rule.

is useful as a decision tool when investment funds are limited and all available funds are allocated.

MM Proposition I without taxes proposes that: there is one ideal capital structure for each firm. the value of a levered firm exceeds that of an unlevered firm. shareholder wealth is directly affected by the capital structure selected. the value of an unlevered firm exceeds that of a levered firm. leverage does not affect the value of the firm.

leverage does not affect the value of the firm.

Dilution commonly refers to the: loss in new shareholder's equity. splitting of a single share of stock into multiple shares. loss in existing shareholder's value. increase in stock value due to wider ownership of stock. issuance of debt to repurchase shares.

loss in existing shareholder's value.

Recently, U.S. nonfinancial corporations have been: net repurchasers of stock. paying off external debt at a record pace. issuing new shares of stock in record numbers. net issuers of stock. primarily relying on external debt.

net repurchasers of stock.

Management's first step in any issue of securities to the public is to: file a registration form with the SEC. prepare the tombstone advertisement. distribute copies of the preliminary prospectus. obtain approval from the board of directors. distribute copies of the final prospectus.

obtain approval from the board of directors.

One example of a nondiversifiable risk is the sudden: replacement of a firm's workforce with robots. resignation of a well-respected president of a firm. resignation of a key employee of a major manufacturer. closing of a business due to a lack of sales. passing of a well-respected Federal Reserve Bank chairman.

passing of a well-respected Federal Reserve Bank chairman.

A proposed acquisition may create synergy by doing all the following except: reducing the acquiring firm's distribution costs. improving the distribution network of the acquiring firm. increasing the market power of the combined firm. providing the combined firm with a strategic advantage. reducing the utilization of the acquiring firm's assets.

reducing the utilization of the acquiring firm's assets.

According to MM Proposition II with no taxes, the: required return on assets exceeds the weighted average cost of capital. cost of debt must equal the cost of equity. required return on equity is a linear function of the firm's debt-equity ratio. cost of equity in inversely related to the firm's debt-equity ratio. return on assets is determined by financial risk.

required return on equity is a linear function of the firm's debt-equity ratio.

The discount rate applied to an individual project should be based on the: sources of funding for that project. risks associated with the project's cash flows. size and duration of the project's life. expertise of the project's managers. sponsoring firm's average level of risk.

risks associated with the project's cash flows.

Bryan invested in Bryco stock when the firm was financed solely with equity. The firm now has a debt-equity ratio of .3. To maintain the same level of leverage he originally had, Bryan needs to: sell some shares of Bryco stock and hold the proceeds in cash. sell some shares of Bryco stock and loan out the proceeds. maintain his current position in Bryco stock. borrow some money and purchase additional shares of Bryco stock. sell half of his Bryco stock and invest the proceeds in risk-free securities.

sell some shares of Bryco stock and loan out the proceeds.

The principle of diversification tells us that: spreading an investment across many diverse assets will eliminate idiosyncratic risk. concentrating an investment in three companies all within the same industry will greatly reduce your overall risk. spreading an investment across five diverse companies will not lower your overall risk. spreading an investment across many diverse assets will eliminate all the risk. concentrating an investment in two or three large stocks will eliminate all your risk.

spreading an investment across many diverse assets will eliminate idiosyncratic risk.

A(n) _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders in the form of a cash payment. merger stock dividend acquisition stock repurchase stock split

stock repurchase

If current shareholders want to acquire one share of stock under a rights plan they must: acquire new shares of stock that are being issued with rights attached. inform the issuer and submit the market price per share desired. submit the number of rights required plus the subscription price. exchange their current shares for new shares that have rights attached. simply pay a registration fee plus the subscription price per share requested.

submit the number of rights required plus the subscription price.

The tax savings of the firm derived from the deductibility of interest expense is called the: financing umbrella. current yield. tax shield from debt. depreciable basis.

tax shield from debt.

Ignore financial distress costs. When (1−TC)(1−TS)=1−TB, then firms: discover that both dividends and interest payments are non-deductible business expenses. tend to be indifferent between issuing debt or issuing equity. should be all-equity financed. need to maintain a debt-equity ratio of .5. can reduce their taxes by increasing their dividend payouts.

tend to be indifferent between issuing debt or issuing equity.

The unlevered cost of capital is: the cost of capital for a firm with no equity in its capital structure. the cost of preferred stock for an all-equity firm. equal to the profit margin for a firm with some debt in its capital structure. the interest tax shield times pretax net income. the cost of capital for a firm with no debt in its capital structure.

the cost of capital for a firm with no debt in its capital structure.

MM Proposition I with taxes supports the theory that: a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm. there is a positive linear relationship between the amount of debt in a levered firm and the firm's value. the value of a firm is inversely related to the amount of leverage used by the firm. a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises. the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.

there is a positive linear relationship between the amount of debt in a levered firm and the firm's value.

The pecking order states that firms should: always issue equity to avoid financial distress costs. issue debt first. always issue debt so the market won't know when managers believe the stock is overvalued. use internal financing first. issue new equity first.

use internal financing first.

A general rule for managers to follow is to set the firm's capital structure such that the firm's: value is maximized. dividend payout is maximized. bondholders are secured. suppliers of raw materials are satisfied. size is maximized.

value is maximized.

The value of a firm is maximized when the: cost of equity is maximized. tax rate is zero. weighted average cost of capital is minimized. levered cost of capital is maximized. debt-equity ratio is minimized.

weighted average cost of capital is minimized.