FINA 3313 Ch. 14, 15, 16
The benefit of an interest tax shield is captured by the equity holders.
TRUE
Debt may be the preferred form of external financing for many firms because:
equity issuance is considered by investors to be a negative sign.
Those who benefit from the interest tax shield are:
equityholders.
Which one of the following statements is correct concerning stock dividends?
Common stock dividends cannot be paid if preferred stock dividends are in arrears.
A capital surplus is obtained when the selling price of new shares is greater than the par value
TRUE
Differences in classes of stock often appear in their voting rights
TRUE
The "trade-off theory" of capital structure suggests that firms have an optimal level of debt
TRUE
The SEC requires the sale of a private placement to be limited to a small number of knowledgeable investors.
TRUE
The gap between internally generated cash and the cash that the company needs is called the financial deficit.
TRUE
The pecking-order theory of capital structure depicts the fact that firms prefer internal financing to avoid sending out adverse signals that may lower the stock price
TRUE
The price at which new shares are sold to investors almost always exceeds par value. The difference is entered into the company's accounts as additional paid-in capital, or capital surplus.
TRUE
Underwriters usually play a triple role—first providing the company with procedural and financial advice, then buying the stock, and finally reselling it to the public.
TRUE
When a public company makes a general cash offer of debt or equity, it essentially follows the same procedure used when it first went public.
TRUE
When asked about key factors of debt policy, financial managers commonly mention the tax advantage of debt and the importance of maintaining their credit rating
TRUE
When firms retain cash, they are generating funds internally thereby decreasing the amount of external funds needed
TRUE
When securities are issued under a firm commitment, the underwriter bears the risk of low sales.
TRUE
When there are no taxes and capital markets function well, the market value of a company does not depend on its capital structure.
TRUE
The trade-off theory of capital structure describes the optimal capital structure for any firm as being the level of debt that:
maximizes the present value of the interest tax shield
A proxy contest is typically one in which:
outsiders attempt to gain control from management
A stock's par value is represented by the:
price at which each share is recorded
Bonds that have been sold only to a limited number of institutional investors are considered
private placements.
Financial risk refers to the
risk faced by equityholders of firms with debt
When underwriters issue securities on a best efforts basis, they
sell as much of the stock as possible, but with no guarantee
A secondary offering IPO occurs when:
the company's founders or venture capitalists market a portion of their shares
According to MM II, as a firm's debt-equity ratio decreases:
the required rate of return on equity decreases.
The most likely reason that under pricing of new issues occurs more frequently than overpricing is that:
underwriters want to reduce the risk of a firm commitment.
Issue costs for debt are considerably lower than issue costs for equity securities.
TRUE
A corporation with funded fixed-rate debt might prefer floating-rate debt if it thought that
interest rates would be declining.
MM's proposition I states that the required rate of return on equity increases as the firm's debtequity ratio increases.
FALSE
Which one of these terms applies to a public company offering new shares to the general public?
General cash offer
When corporate taxes are considered, how does leverage affect the WACC?
Increased leverage will decrease the WACC.
Which one of the following lists presents the order of financing from most preferred to least preferred according to the pecking-order theory?
Internally generated funds, debt issue, stock issue
Which one of the following statements about floating-rate preferred stock is correct?
Its dividends increase as interest rates increase.
Shares of stock that have been issued and subsequently repurchased by the issuer are known as treasury stock.
TRUE
Suppose a firm needs fresh capital, but its management does not want to give up its controlling interest. The existing shares could be labeled Class A, and then Class B shares with limited voting rights could be issued to outside investors.
TRUE
Which one of the following equity concepts would you expect to be least important to a financial analyst?
Par value per share
A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.
TRUE
Costs of financial distress are costs arising from bankruptcy or distorted business decisions before bankruptcy.
TRUE
Debt finance does not affect the operating risk but it does add financial risk
TRUE
Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds.
TRUE
Financial leverage describes debt financing's amplification of the effects of changes in operating income on the returns to stockholders
TRUE
If shareholders do not like the policies that management pursues, their easiest solution is to vote in a different board of directors
TRUE
In a rights offering, the shares are priced at a substantial discount to current market value, which ensures that the shareholders will either exercise the rights themselves or sell them to other investors.
TRUE
Once you recognize the fact that debt also increases financial risk and causes shareholders to demand a higher return on their investment, debt is no cheaper than equity
TRUE
A major purpose of the prospectus is to
advise investors of the security's potential risks.
In return for providing funds, venture capitalists generally require:
an equity position in the firm.
The most important function of an underwriter is to:
buy the securities issue from the firm and resell the securities to the public
When new shares of stock are sold at a price greater than par value, the excess over par is recorded as:
capital surplus.
According to pecking-order theory, managers will often choose to finance with:
debt rather than new equity, to avoid reduced share price.
Issue costs for equity are higher than those for debt for all of the following reasons except:
equity issues have no economies of scale.
When securities are issued under a rights issue:
existing shareholders have the opportunity to expand their holdings
MM's proposition II without taxes states that the
expected return on equity increases as financial leverage increases.
Funded debt refers to those liabilities that
have a maturity of more than one year remaining
Preferred stock dividends:
have priority over common stock dividends
An increase in a firm's financial leverage will
increase the variability in earnings per share.
Leverage will _____ shareholders' expected return and ______ their risk.
increase; increase