Financial Management Final

Which of the following are consequences of nonpayment of debt obligations?

-a firm may be forced to file for bankruptcy -the firm will encounter some form of financial distress

How do bankruptcy costs affect bondholders and shareholders in the context of the distribution of firm value

-both bondholders and shareholders are adversely affected

Financial distress can arise in the form of possible

-business failure -legal bankruptcy

a corporation gains no value from an interest tax shield

-corporation has no debt -corporate tax rates are zero -corporation is an all-equity firm

which of the following are sensible payout policies

-set a consistent dividend policy -avoid cutting positive NPV projects to pay dividends -over time, pay out all free cash flows

Which of the following are reasons why investors might favour a high-dividend payout?

-stock sales are time consuming -the transactions costs for selling low dividend paying stocks can -investors have a preference for current

In a world without bankruptcy costs or taxes, the value of the firm (the pie) is divided among which of the following?

-stockholders -bondholders

In the absence of taxes, the value of a firm is the same with debt financing as it is with equity financing because

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

Which of the following will apply when a firm's debt levels are extremely high?

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

Which of the following are generally true about the cost of equity and the cost of debt?

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

Which of the following are reasons for reverse stock splits?

-to eliminate small shareholders -to comply with listing requirements -to raise stock prices to respectable levesl

Place the steps needed to calculate the values of a levered firm with perpetual cash flows in order starting with the first step

1. Calculate ebit 2. multiply EBIT by 1 minus the corporate tax rate 3. divide by the cost of equity for an all-equity firm 4. Add the present value of the debt tax shield

What is the preferred source of financing for firms according to the pecking order theory?

1. Retained earnings 2. debt 3. common stock

In 2000, 80% of the aggregate dividends from US companies were paid by

100 large firms

MM's assertion of a positive relationship between firm value and leverage is widely observed in the business world

FALSE

True or false: dividends are irrelevant

FALSE

true or false: there is a precise mathematical equation for determining debt for any firm

FALSE

T or F Nonpayment of periodic interest on debt can lead to bankruptcy

TRUE

According to the clientele effect, can a firm boost its share price by raising dividends?

Yes, but only if an unsatisfied clientele exist

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

a discount rate commensurate with the project's risk

Stockholders and bondholders

are not the only claimants to the cash flows of the firm

When is the present value of distress costs likely to exceed the present value of the tax shield

at high levels of debt

Homemade dividends allow a stockholder to change the ________-

cash payout received by selling shares to receive current cash or purchasinng addition

the cost of debt will begin to increase as the

degree of leverage increases

Which two of the following are broad types of costs of financial distress?

direct and indirect costs

An unlevered firm_____________

has an all-equity capital structure

to a tax-paying stockholder, a stock repurchase generally

has significant tax advanagts compared to a cash dividend

A one-for-five reverse stock split will

increase a $1 par value to $5

In a perfect market stockholders are ________ between a stock _______and a _______

indifferent; repurchase; dividend

according to critics of modigliani and miller the capital structure

irrelevant

with a 2-for-1 stock split, the number of shares are doubled and the par value

is cut in half

The manager of a firm should change the capital structure if and only if

it increases the value of the firm

Which of the following are nonmarketed claims to the firms cash flows?

legal fees taxes

According to a recent survey, the highest priority for financial managers is to

maintain a consistent dividend policy

the information content of a dividend decrease may be that

management believes future earnings will decline

Based on the static theory, what should the managers

maximize the tax shield benefit of debt and minimize financial distress

The value of the firm is maximized when the weighted average cost of capital is

minimized

If a firm issues new equity, investors will infer that the firm's outstanding stocks must be

overvalued

The point at which the tax saving from an additional dollar in debt financing is exactly

static theory of capital structure

MM II Proposition Shows That:

the cost of equity rises with leverage

what is the likely impact on a stock's price when dividends are paid

the price will fall

Which theory of capital structure leads to a target debt ratio

the static trade-off theory of capital structure

What are some ways in which a bankruptcy filing might hinder a firm's normal business operations?

-customers may not buy, fearing future service problems -suppliers may not supply inventory, fearing nonpayment -banks may place restrictions on the firm's financial activities

The WACC is the cost of _________ times its weight in the capital structure plus the cost of _______ times its weight in the capital structure

-debt; equity

A firm can pay out its cash earnings to its shareholders in which of the following ways

-dividends -share repurchase

Dividends received by shareholders are expressed in which of the following

-dividends per share -dividend payout -dividend yield

According to graham, dodd, and cottle, firms should generally have

-everything else being equal, firms that pay higher dividends usually sell at a higher perice -the discounte dvalue of near dividends is greater than the discour

What are some examples of indirect financial distress costs?

-lost sales -lost reputation

Which of the following usually occur with a stock dividend?

-no cash laves the firm -the price per share falls -the number of shares increase

A firm's cost of debt can be

-obtained by checking yields on publicly traded bonds -obtained by talking to investment bankers -estimated easier than its cost of equity

The _________ theory is the dominant theory of capital structure

trade-off

True or false: it is possible for the present value of distress costs to exceed the present value of tax savings

true

Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings?

-the rate of return on assets in unaffected by leverage -below the indiferrence or break-even point in ebit -financial leverage increases the slope of the eps line