Finance 3060 ch 12-14

Date at which a stockholder must purchase stock

ex-dividend date

the most appropriate weights to use in the WACC are the _____ weights

market value

as a general rule, it is better to set the firm's capital structure so that ________:

the firm's value is maximized

under MM proposition II, a firm's WACC remains unchanged regardless of changes in its capital structure because as the % of debt increases _______

the increase in the cost of both debt and equity is exactly offset by the increase in the % of lower cost debt

industries that have a low leverage

-drugs -computers

if there are no taxes or flotation costs, then investors will

be indifferent between dividends and a repurchase

some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably:

better than no risk adjustment

the equity risk that comes from the nature of a firm's operating activities is known as:

business risk

the rate used to discount project cash flows is known as the ____

discount rate, cost of capital, required return

according to M&M proposition I, a firm's capital structure choices:

do not affect the value of the firm

the optimal level of debt in the presence of corporate taxes and bankruptcy costs occurs at the point at which the present value of distress costs _____ the present value of the tax shield benefits

equals

if the firm is all-equity, the discount rate is equal to the firm's cost of _____ capital

equity

the WACC rises at higher levels of debt owing to

financial distress costs

static theory of capital structure

idea that a firm borrows to the point that the tax benefit of debt is exactly equal to the increased probability of financial distress

advantages of the SML approach:

-adjusts for risk -does not require the company to pay a dividend

Direct costs of financial distress:

-administrative expenses -legal fees

industries that tend to have a high leverage:

-cable television -airlines

what can be said about the dividends paid to common and preferred stockholders?

-dividends to common stockholders are NOT fixed -dividends to preferred stockholders ARE fixed

factors that favor a low dividend payout:

-flotation costs -bond covenant restrictions -tax laws

broad types of costs of financial distress:

-indirect costs -direct costs

a capital restructuring may include:

-issuing debt and repurchasing equity -issuing more debt -issuing more equity

capital restructuring may include:

-issuing debt and repurchasing equity -issuing more debt -issuing more equity

financial distress can arise in the from of possible:

-legal bankruptcy -business failure

the tax shield afforded by debt will be of the lease use to firms with:

-losses carried forward -negative EBT

indirect financial distress costs:

-lost sales -lost reputation

accounting for the time value of money, which of the following is true of an increase in dividend payout at a point in time

-net effect is 0 -it is exactly offset by a decrease somewhere else

preferred stock _____:

-pays dividend in perpetuity -pays a constant dividend

the following are disadvantages of the SML approach

-requires estimation of the market risk premium -requires estimation of beta

the growth rate of dividends can be found using:

-security analysts' forecasts -historical dividend growth rates

according to MM proposition I, the value of a firm is the same for debt financing as it is for equity financing because of

-the asset to be financed is the same -MM demonstrated that debt financing is neither better nor worse than equity financing

side effects of the cost of equity and the cost of debt

-the cost of equity may increase with leverage -the cost of debt increases with leverage -the cost of debt is generally lower than the cost of equity

what will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level?

-the firm overall will become riskier -it will accept projects that it should have rejected -it will reject projects that it should have accepted

outcomes when a firm's debt levels are extremely high:

-the possibility of financial distress will become a chronic problem -the benefits of debt financing may be more than offset by the costs of financial distress

M&M proposition I states if the assets and operations (left-side of the balance sheet) for two firms are the same, then ______:

-the value of the two firms is equal -how the firms are financed is irrelevant

payment priority:

1) administrative expenses 2) wages, salaries, & commissions 3) consumer claims 4) payment to common shareholders

if a preferred stock pays a dividend of $2 per year and is selling for $20, its yield is:

10%

Alpha Co. has a debt-equity ratio of .6, a pretax cost of debt of 7.5 percent, and an unlevered cost of equity of 12%. what is Alpha's cost of equity if you ignore taxes?

14.7%

If a firm is funded with $400 in debt and $1200 in equity, the weight of equity in the capital structure is _____% and the weight of debt is _____%

75;25

WACC was used to compute the following project NPVs: Project A=$100, project B=-$50, project C=-$10, project D=$40. which project should the firm accept?

A & D

with a share repurchase:

EPS will increase and total earnings will not change

the formula for calculating the cost of equity capital that is based on the dividend discount model is:

Re = D1/Po + g

if a firm has multiple projects, each project should be discounted using _____

a discount rate commensurate with the project's risk

the discount rate for the firm's projects equals the cost of capital for the firm as a whole when:

all projects have the same risk as that of the firm overall

the costs of financial distress depend mostly on how easily the ownership of the firm's ________ can be transferred

assets

the fact that failure to meet debt obligations can result in bankruptcy is _______.

bad for the firm

when a stock's dividends are paid, the stock's price will:

fall

capital structure decisions are made _______ investment decisions

independent of

if a firm issues no debt, its average cost of capital will equal:

its cost of equity

volatility or _________ increases for equity holders when leverage increases

risk

Dividend policy is centered around whether a firm should pay out money to its shareholders or

take money and invest it for shareholders

MM proposition II shows that ______:

the cost of equity rises with leverage

according to the CAPM, what is the expected return on a stock if its beta is equal to zero?

the risk-free rate

interest tax shield

the tax savings attained by a firm from the tax deductibility of interest expense is called

dividend policy is best described as:

the time pattern of dividend payout

if a firm uses its overall cost of capital to discount cash flows from projects in higher risk divisions, it will accept _____ projects

too many

value of a levered firm in the presence of corporate taxes

value of unlevered firm + tax benefit of debt

for a firm with outstanding debt, the cost of debt will be the _______ on that debt

yield to maturity

which of the following is true about a firm's cost of debt?

yields can be calculated from observable data, it is easier to estimate than the cost of equity