ACF Final
Which of the following best describes a limited partnership that specializes in raising money to invest in the private equity of young firms? A) venture capital firms B) corporate investors C) institutional investors D) family investors
A) venture capital firms
Which of the following statements is FALSE? A) SEO rights offers have lower costs than cash offers. B) Researchers have found that, on average, the market greets the news of an SEO with a price increase. C) Although not as costly as IPOs, seasoned offerings are still expensive. D) The decision to raise financing externally usually implies that a firm plans to pursue an investment opportunity.
B) Researchers have found that, on average, the market greets the news of an SEO with a price increase.
Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists? A) The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs. B) The long-run performance of a newly public company (three to five years from the date of issue) is superior to the overall market return. C) On average, IPOs appear to be underpriced. D) The number of issues is highly cyclical.
B) The long-run performance of a newly public company (three to five years from the date of issue) is superior to the overall market return.
Which of the following statements is FALSE? A) The two advantages of going public are greater liquidity and better access to capital. B) The process of selling stock to the public for the first time is called a seasoned equity offering (SEO). C) Public companies typically have access to much larger amounts of capital through the public markets. D) By going public, companies give their private equity investors the ability to diversify.
B) The process of selling stock to the public for the first time is called a seasoned equity offering (SEO).
The tradeoff theory of optimal capital structure weighs the benefits of debt against the costs of ________. A) input factors B) financial distress C) interest payments D) dividend reinvestment
B) financial distress
By adding leverage, the returns on a firm are split between debt holders and equity holders, but equity holder risk increases because ________. A) interest payments can be rolled over B) interest payments have first priority C) dividends are paid first D) debt and equity have equal priority
B) interest payments have first priority
It is not correct to discount the cash flows of a levered firm with the cost of equity of the unlevered firm because ________. A) cost of debt decreases in this setting B) leverage increases the risk of the equity of the firm C) leverage changes the unlevered cost of equity D) leverage decreases the risk of equity of the firm
B) leverage increases the risk of the equity of the firm
Equity in a firm with debt is called ________. A) unlevered equity B) levered equity C) preferred equity D) risk-free equity
B) levered equity
Which form of the efficient market hypothesis best describes the concept that market prices include all information, both public and private? A) Weak-form EMH B) Simple-form EMH C) Strong-form EMH D) Semi-strong EMH
C) Strong-form EMH
Investment cash flows are independent of financing choices in a ________. A) market with frictions B) firm with leverage C) perfect capital market D) setting with frictions in investment returns
C) perfect capital market
Which of the following statements is FALSE? A) We can estimate the value of a firm's shares by multiplying its current earnings per share by the average price-earnings ratio of comparable firms. B) Trailing earnings are the earnings over the previous 12 months. C) Forward earnings are the expected earnings over the coming 12 months. D) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings.
D) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings.
Which of the following is NOT a reason why an IPO is attractive to the managers of a private company? A) It gives access to large amounts of capital in the IPO. B) It gives its private equity investors the opportunity to diversify. C) It gives access to much larger amounts of capital through the public markets in subsequent offerings. D) It reduces the complexity of requirements regulating the company's management.
D) It reduces the complexity of requirements regulating the company's management.
An investor estimates the value of a firm which manufactures cookware by examining the cash flows of similar firms. Which of the following is assumed to be the same for these firms? A) P/E B) annual growth rates C) payout rates D) all of the above
D) all of the above
Aside from direct costs of bankruptcy, a firm may also incur other indirect costs such as ________. A) loss of interest receipts B) loss of dividend receipts C) increase in raw material costs D) loss of customers and loss of suppliers
D) loss of customers and loss of suppliers
Four characteristics of IPOs which puzzle financial economists: On average, IPOs appear to be underpriced: The price at the end of trading on the first day is often substantially higher than the IPO price. The number of IPOs is highly cyclical: When times are good, the market is flooded with IPOs; when times are bad, the number of IPOs dries up. The costs of the IPO are very high: It is unclear why firms willingly incur such high costs. The long-run performance of a newly public company (three to five years from the date of issue) is poor: That is, on average, a three- to five-year buy and hold strategy appears to be a bad investment.
On average, IPOs appear to be underpriced: The price at the end of trading on the first day is often substantially higher than the IPO price. The number of IPOs is highly cyclical: When times are good, the market is flooded with IPOs; when times are bad, the number of IPOs dries up. The costs of the IPO are very high: It is unclear why firms willingly incur such high costs. The long-run performance of a newly public company (three to five years from the date of issue) is poor: That is, on average, a three- to five-year buy and hold strategy appears to be a bad investment.