Chapters 13-18, 24 Finance
You have $49,762 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $7,922 and then deposit a check for $10,024. What is your net float?
-2,102: Net float is the available balance at the bank less your book balance. Since checks written decrease the book balance immediately and checks deposited increase your book balance immediately, your net float is the check you wrote less the check you deposited.
Which one of the following is basically equivalent to a 2-for-1 stock split?
100 percent stock dividend
Webster's currently has an inventory turnover of 15.7, a payables turnover of 9.6, and a receivables turnover of 8.4. How many days are in the cash cycle?
28.68 days: Cash cycle = (365/15.7) + (365/8.4) - (365/9.6)
A firm offers terms of 2/5, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount?
34.31 percent
A firm grants credit with terms of 2/5, net 20. The firm's customers have ___ days to pay in order to receive a _____ percent discount.
5; 2
Which one of the following grants its owner the right, but not the obligation, to purchase an asset at a stated price?
A call
Which one of the following will decrease the value of a call option?
A decrease in the volatility of the underlying stock's returns
Which one of the following best defines legal bankruptcy?
A legal proceeding for liquidating or reorganizing a business
Which of the following will increase the value of a call option? A) An increase in the underlying stock price further above the strike price B) A decrease in the risk-free interest rate C) Less time to expiration as days pass D) A decrease in the volatility of the underlying stock's returns
A) An increase in the underlying stock price further above the strike price
Which of the following refers to a customer's willingness to meet his or her credit obligations? A) Character B) Capacity C) Capital D) Conditions
A) Character
All else constant, which one of the following will decrease the cash cycle? A) Decreasing the credit period granted to a customer B) Decreasing the inventory turnover rate C) Decreasing the accounts payable period D) Decreasing the accounts receivable turnover rate
A) Decreasing the credit period granted to a customer
Which of the following statements is TRUE? A) The value of a call option can never be negative. B) The value of a call decreases as the price of the underlying stock increases. C) The value of a call increases when the volatility of the underlying asset's returns decreases. D) The intrinsic value of a call must be zero on the expiration date.
A) The value of a call option can never be negative
You own 100 shares of JKL Inc. which has 20,000,000 shares outstanding that currently sell for $40 per share. JKL has previously announced a dividend of $0.80 per share with an ex-dividend date of May 31. Assume there are no taxes or other special advantages or disadvantages of dividends. If you take no action, which of the following statements is TRUE? A) You should expect the stock price to drop to $39.20 on May 31. B) You should expect the value of your brokerage account portfolio to increase by $80 on May 31. C) You should expect to receive 2 more shares of JKL in your account on May 31. D) You should expect to own a larger fraction of JKL's remaining outstanding shares on May 31.
A) You should expect the stock price to drop to $39.20 on May 31
In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first?
Absolute priority rule
The cash cycle is equal to which one of the following?
Accounts receivable period minus the accounts payable period plus the inventory period
All else held constant, which one of the following statements is correct concerning the accounts payable period
An increase in the accounts payable period will decrease the cash cycle.
Which one of the following most likely represents the greatest political risk for a U.S.-based firm? A) A Boeing airplane assembly plant located in Canada B) A Koch Industries oil refinery in a port in Venezuela C) A Merck pharmaceutical sales office in Germany D) A Ford automotive parts plant in Korea that uses U.S. made components
B) A Koch Industries oil refinery in a port in Venezuela
Which was a source of cash, increasing a firm's cash balance, all else equal? A) $20 million shares repurchased in the open market. B) Accounts payable increased by $50 million. C) $15 million in sales from inventory on credit, simultaneously increasing accounts receivable by $15 million. D) $60 million of short-term debt was paid off and partially refinanced with $40 million in long-term debt.
B) Accounts payable increased by $50 million
Which of the following is NOT an example of an option found in financial claims? A) Employee stock options that provide incentives to align managers' interests with shareholders B) Bank loans in which a firm is obligated to pay interest and principle over time C) Convertible preferred shares that can be exchanged for common shares at a pre-specified conversion ratio D) Equity owners' choice to repay risky debt to avoid bankruptcy
B) Bank loans in which a firm is obligated to pay interest and principle over time
Which one of the following activities is a source of cash? A) Decreasing long-term debt B) Decreasing accounts receivable C) Increasing fixed assets D) Repurchasing shares of stock
B) Decreasing accounts receivable
Which one of the following is most indicative of a flexible short-term financial policy? A) High ratio of short-term debt to long-term debt B) High ratio of current assets to sales C) Low level of net working capital D) Relatively low level of liquidity
B) High ratio of short-term debt to long-term debt
Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following? A) Short-run exposure to exchange rate risk B) Long-run exposure to exchange rate risk C) Translation exposure to exchange rate risk D) Political risk associated with the foreign operations
B) Long-run exposure to exchange rate risk
For which one of the following instruments does a bank guarantee payment by the buyer?
Banker's acceptance
Which one of the following is the equity risk arising from the daily operations of a firm?
Business risk
Which of the following statements is FALSE about initial public offerings? A) IPOs are often underwritten by a syndicate of investment banks for a 7% spread on average B) IPOs must be registered with the SEC, which costs about 3% in accounting and legal fees C) An IPO's exact price is published in a red-herring two weeks before selling begins D) IPOs are underpriced on average by about 19%
C) An IPO's exact price is published in a red-herring two weeks before selling begins
Which of the following will decrease the value of a call? A) An increase in the underlying stock price over the strike price B) An increase in the risk-free interest rate C) Less time to expiration as days pass D) An increase in the volatility of the underlying stock's returns
C) Less time to expiration as days pass
BNM is comparing different capital structures. Plan A is all equity with 20m (million) shares outstanding. Plan B would result in 14m shares and $150m in debt. Plan C would result in 11m shares and $225m in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare these plans assuming that expected EBIT is $45m. Of the three plans, the firm will have the highest expected EPS with _____ and the lowest expected EPS with _____. A) Plan A; Plan B B) Plan A; Plan C C) Plan C; Plan A D) Plan B; Plan C
C) Leverage increases expected EPS and ROE (but increases their riskiness too) Expected EPS(All-equity Plan A) = $45m/20m = $2.25 Expected EPS(Plan B) = [$45m - ($150m × 0.08)/14m = $2.36 Expected EPS(Plan C) = [$45m - ($225m × 0.08)]/11m = $2.45
Research conducted on firms' dividend policies over time support which one of the following conclusions? A) Aggregate dividends and stock repurchases have steadily declined in real terms. B) Dividends are currently paid by the vast majority of firms. C) Managers tend to smooth dividends. D) Stock prices tend to increase whenever anticipated changes in dividends occur.
C) Managers tend to smooth dividends
Cash dividends send which of the following signals to the market? A) Agency costs will be raised since the firm will have less flexibility B) The firm is planning on downsizing C) The firm is currently, and expects to continue to be, profitable D) The firm will no longer conduct stock repurchases
C) The firm is currently, and expects to continue to be, profitable
Suppose you could buy 1,320 South Korea won or 78 Pakistan rupees last year for $1. Today, $1 will buy you 1,318 won or 80 rupees. Which one of the following occurred over the past year? A) The won depreciated against the dollar. B) The dollar depreciated against the rupee. C) The rupee depreciated against the dollar. D) The dollar appreciated against both the won and the rupee.
C) The rupee depreciated against the dollar
When is a firm insolvent from an accounting perspective? A) When the firm is unable to meet its financial obligations in a timely manner B) When the firm's debt exceeds the value of the firm's equity C) When the firm has a negative net worth D) When the firm's revenues cease
C) When the firm has a negative net worth
What is the name given to a subsidiary of a firm that exists solely to handle the credit functions of the parent company?
Captive finance company
Which one of the following refers to a customer's willingness to meet his or her credit obligations?
Character
Which one of the following correctly matches a country with its currency?
China-yuan
Which one of the following statements is correct? A) Firms that follow restrictive financial policies can generally avoid short-term debt financing. B) Short-term borrowing is generally more expensive than long-term borrowing. C) Long-term interest rates tend to be more volatile than short-term rates. D) A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.
D) A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy
Which of the following is NOT a justification for IPO underpricing? A) Young firms tend to be very risky. B) The best IPOs are oversubscribed. C) Underwriters like to avoid lawsuits. D) It benefits the existing shareholders.
D) It benefits the existing shareholders
Which one of the following activities is a source of cash?
Decreasing accounts receivable
All else constant, which one of the following will decrease the cash cycle?
Decreasing the credit period granted to a customer
Which one of the following best represents the transaction motive for holding cash?
Distributing the weekly paychecks
A 'fortress' balance sheet generally includes restrictive short-term financial policies. T/F
False
A Chapter 7 bankruptcy allows a firm to reorganize and continue operations as "debtor-in-possession." T/F
False
A call option is the right to sell an asset at a fixed price during a particular period of time, while a put option is the right to buy an asset at a fixed price during a particular period of time. T/F
False
A delayed registration permits a firm to register an offering under SEC 415 and then issue the securities over a two-year period. T/F
False
A restrictive short-term financing policy has high carrying costs and low shortage costs. T/F
False
A stock buyback refers to the purchase of the firm's shares of stock by the firm's debt holders. T/F
False
Activities that increase cash are called uses of cash, and activities that decrease cash are called sources of cash. T/F
False
Bankruptcy occurs whenever a firm is unable to meet obligations or reports negative book equity. T/F
False
European options are options that may be exercised at any time until its expiration date. American options, however, are options that may be exercised only on the expiration date. T/F
False
Financial distress and bankruptcy costs cause WACC to decrease as leverage increases. T/F
False
Firm commitment underwriting is far less prevalent for large issues than best efforts underwriting, which is likely due to the lower uncertainty of smaller issues. T/F
False
Firms prefer to maintain a net collection float, rather than a net disbursement float, because they are receiving more money than they are spending. T/F
False
Firms that assists issuers by pricing and selling new securities to the general public are called venture capitalists. T/F
False
Increasing current liabilities, such as getting a 90-day loan, will decrease cash. T/F
False
Instability in financial markets has led corporations to choose restrictive short-term financial policies. T/F
False
Leverage decreases the volatility of both ROE and EPS. T/F
False
Leverage increases expected ROE but decreases expected EPS. T/F
False
Leverage reduces the expected values of both EBIT and net income. T/F
False
Like Johnson & Johnson (JNJ), nearly all of the 30 Dow Jones Industrial companies were forced to reduce their dividends per share in 2009 and again in 2010 due to the Great Recession. T/F
False
Like typical large US companies, Apple uses about 60% debt in its capital structure. T/F
False
MM Proposition 2, if there are no taxes, explains how the cost of equity decreases as the firm increases its use of debt financing. T/F
False
On average, when companies increase dividends, their stock prices climb by about the same amount in magnitude as their stock prices fall when they decrease dividends. T/F
False
Promissory notes are the most common credit instrument. T/F
False
Sometimes an option can be worth less than zero. T/F
False
Technical insolvency occurs when a firm has a negative net worth, because the book value of its liabilities are less than the book value of its assets. T/F
False
The accounts payable period is the time between the sale of inventory and the collection of the receivable. T/F
False
The credit period is typically longer for perishable goods and for buyers with higher credit risk. T/F
False
The direct and indirect costs of going public can be substantial, and once a firm goes public, it will not be able to easily raise additional capital. T/F
False
The key risk for a flexible short-term financing policy is losing credit access. T/F
False
The operating cycle is the time period between cash disbursement and cash collection. T/F
False
The venture capital market is the primary source of financing for established firms with proven profitability. T/F
False
Under M&M assumptions which ignore special benefits and costs of debt, leverage has a substantial impact on total firm value and on WACC. T/F
False
n the five Cs of credit, capacity refers to the customer's willingness to meet credit obligations out of operating cash flows. T/F
False
Which one of the following terms is inclusive of both direct and indirect bankruptcy costs?
Financial distress costs
Which one of the following statements concerning financial leverage is correct?
Financial leverage magnifies both profits and losses and Changes in the capital structure of a firm will generally change the firm's earnings per share.
Which one of the following is the equity risk arising from the capital structure selected by a firm?
Financial risk
Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?
Firm commitment underwriting
Which one of the following statements concerning debt issues is correct?
Firms often pay higher interest rates on term loans than on public issues of debt.
Which one of the following is the agreed-upon exchange rate that is to be used when currencies are exchanged at some point in the future based on an agreement made today
Forward exchange rate
Which one of the following is most indicative of a flexible short-term financial policy?
High ratio of current assets to sales
Cash dividends send which two of the following signals to the market? I. agency costs will be lowered since less cash will be held by the firm II. the firm is planning on downsizing III. the firm is currently, and expects to continue to be, profitable IV. the firm will no longer conduct stock repurchases
I and III only
Which of the following have been offered as justification for IPO underpricing? I. Young firms tend to be very risky. II. The best IPOs are oversubscribed. III. Underwriters like to avoid lawsuits. IV. It benefits the existing shareholders.
I, II, and III only
Which of the following statements correctly relate to M&M Proposition I, with taxes? I. Debt decreases the value of a firm. II. The levered value of a firm exceeds the firm's unlevered value. III. The weighted average cost of capital (WACC) is constant. IV. The optimal capital structure is zero debt.
II only
Which one of the following terms applies to the costs incurred by a firm which is trying to avoid filing for bankruptcy?
Indirect bankruptcy costs
What is the primary purpose of a cash discount?
Inducement to pay promptly
which one of the following would be the most common evidence of indebtedness when a sale is made on open account?
Invoice
Which one of the following is a system for managing demand-dependent inventories that minimizes the amount of inventory on hand?
Just-in-time inventory system
Which one of the following is a direct bankruptcy cost?
Legal and accounting fees related to a bankruptcy proceeding
Which one of the following terms refers to the termination of a firm as a going concern?
Liquidation
Which one of the following specifies the length of time that must pass after an IPO before insiders are permitted to sell their shares?
Lockup period
Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following?
Long-run exposure to exchange rate risk
Research conducted on firms' dividend policies over time support which one of the following conclusions?
Managers tend to smooth dividends.
Which one of the following actions is indicative of a restrictive short-term financial policy?
Minimizing the cash balances held by the firm
Which one of the following most likely represents the greatest political risk for a U.S.-based firm?
Natural ore mine in a foreign country
Venture capital is most apt to be the source of funding for which one of the following?
New, high-risk venture
Lexington Stables just declared a 15 percent stock dividend. Which one of the following increased by 15 percent as a result of this dividend?
Number of shares outstanding
Which one of the following tends to be the primary attitude of firms' towards their dividend policy?
Once a dividend is increased, it should not be decreased.
Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit.
Operating cycle
Which one of the following describes a Green Shoe provision?
Overallotment option
Which one of the following is a use of cash?
Paying a supplier for inventory you purchased last month
Gabe's Market is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $225,000 in debt. Plan II would result in 14,000 shares of stock and $150,000 in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $45,000. The all-equity plan would result in 20,000 shares of stock outstanding. Of the three plans, the firm will have the highest EPS with _____ and the lowest EPS with _____.
Plan I; all-equity plan: EPSAll-equity = $45,000/20,000 = $2.25 EPSPlan I = [$45,000 - ($225,000 × 0.08)]/11,000 = $2.45 EPSPlan II = [$45,000 - ($150,000 × 0.08)/14,000 = $2.36 EOC #: 13.6
What is the legal document called that is provided to potential investors and describes a new security offering?
Prospectus
Which one of the following projects is most apt to be financed with venture capital?
Prototype for a newly patented hand tool by an individual inventor
Lisa is interested in purchasing 1,000 shares of TJH, Inc. when the shares are issued. Her broker just gave Lisa a preliminary prospectus on these shares for her to review as she waits for the shares to be cleared for sale. What is the name of this prospectus?
Red herring
Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process. Which one of the following terms best applies to this situation?
Reorganization
Which one of the following terms could be defined as a new issue of common stock offered to the general public by a firm that is currently publicly held?
Seasoned equity offering
Accounts receivable financing is the term used to describe which of the following types of loans which involve either the assignment or the factoring of a firm's accounts receivables?
Secured short-term loan
By definition, an inventory loan is which one of the following types of loan?
Secured short-term loan
Which one of the following is the name given to a registration of securities under SEC 415 which permits a firm to issue the securities over a two-year period?
Shelf registration
Which one of the following best describes a line of credit?
Short-term prearranged bank loan that can be either committed or noncommitted
A trader in Switzerland just agreed to trade Swiss francs for British pounds based on today's exchange rate. The trade is expected to settle tomorrow. What term best describes this exchange?
Spot Trade
This morning, Lambert Materials bought 10,000 of its outstanding shares in the open market. What type of transaction was this?
Stock repurchase
Which one of the following increases the number of shares outstanding but does not increase the value of owner's equity?
Stock split
What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering?
Syndicate
What is the largest exchange market?
The foreign exchange market is the largest financial market in the world.
Observed Capital Structures. Which of the following is not correct?
The more capital intensive industries, such as airlines, cable television, and electric utilities, tend to use less financial leverage.
Suppose you could buy 1,320 South Korea won or 78 Pakistan rupees last year for $1. Today, $1 will buy you 1,318 won or 80 rupees. Which one of the following occurred over the past year?
The rupee depreciated against the dollar.
Which one of the following statements is correct concerning dividends in the U.S.?
There are less than 75 companies in the U.S. that have consistently increased their dividends for at least the past 25 years.
What is the advertisement, commonly found in financial newspapers, that announces a public offering of securities and provides the name of the underwriters called?
Tombstone
The foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of which one of the following?
Translation exposure to exchange rate risk
'Homemade leverage' is the use of personal borrowing to adjust the overall amount of financial leverage to which the individual investor is exposed. T/F
True
A 'fortress' balance sheet is typified by flexible policies with higher carrying costs, extra cash, and generous receivables, but creates the risk of a mismatch between short-term assets financed with long-term financial claims like bonds. T/F
True
A Green Shoe provision gives the underwriters the right to purchase additional shares at the offer price to cover overallotments. T/F
True
A reverse split is a stock split under which a firm's number of shares outstanding is reduced. T/F
True
A stock dividend is a payment in the form of stock made by a firm to its owners, diluting the value of each share outstanding. T/F
True
A stock split is an increase in a firm's shares outstanding without any change in owners' equity. T/F
True
Alcoa discontinued its dividends in 2008 and 2009, which coincided with a sharp decrease in its stock price. T/F
True
Apple paid its first dividend to common shareholders in 2012, and Berkshire Hathaway has not yet paid dividends to common shareholders. T/F
True
Banker's acceptances are commonly used in international trade. T/F
True
Banker's acceptances are credit commitments made before delivery, are guaranteed by banks, and are common in international trade. T/F
True
Bankruptcy refers to the legal proceeding for liquidating or reorganizing a business. T/F
True
Because interest expense is tax deductible, a firm's WACC decreases as firms rely more heavily on debt financing. T/F
True
Because interest expense is tax deductible, leverage increases the firm's value by the amount of the present value of the interest tax shield. T/F
True
Borrowing short-term to meet peak needs and maintaining a cash reserve for emergencies is described as a compromise policy for short-term financing. T/F
True
Credit management trades off the carrying the cost of extending credit to buyers against the goal of increasing sales. T/F
True
Decreasing current assets other than cash, such as collecting accounts receivable, is considered a source of cash. T/F
True
Direct expenses include filing fees, legal fees, and taxes and are costs incurred by the issuer that are not part of the compensation to underwriters. T/F
True
Firms often invest idle cash in money market securities which are short-term, safe, and easily marketable T/F
True
Firms seek to manage their cash by keeping no more than is needed on hand, because holding cash has an opportunity cost, namely, the returns that could be earned by investing the money. T/F
True
Float equals the difference between the cash balance available at the bank and the cash balance recorded on the firm's books, and float also equals the sum of the disbursement float and the collection float (which is negative). T/F
True
Following a Chapter 11 filing a few years earlier and failed attempts to negotiate concessions with its unions, Hostess again in 2012 filed for bankruptcy with the intent to liquidate its assets. T/F
True
For commercial drafts, the buyer accepts it and commits to payment before delivery. T/F
True
For initial public offerings, losses arise when shares are sold below their true value; hence, the underpricing of IPOs is an additional implicit cost to the issuer. T/F
True
In a Chapter 7 bankruptcy liquidation, employees and trade creditors have lower priority among claimants than senior and secured lenders. T/F
True
In a bankruptcy reorganization, middle managers or 'white collar' employees lose their jobs more commonly than production workers or 'blue collar' employees. T/F
True
In the five Cs of credit, collateral are the assets pledged by the customer for security in case of default. T/F
True
Increasing current assets other than cash, such as extending more credit to customers, is considered a use of cash. T/F
True
Increasing long-term debt increases cash. T/F
True
Increasing long-term debt, or borrowing over the long term, increases cash. T/F
True
Interest expense reduces taxable income and net income but not EBIT. T/F
True
Investors can create their own leverage within their own portfolios. T/F
True
Johnson and Johnson exemplifies a company that steadily increased its dividend amount in a stair step way roughly every year from 2001 to 2012. T/F
True
Legal bankruptcy occurs when the firm or creditors bring petitions to a federal court for bankruptcy. T/F
True
Liquidation is the termination of the firm as a going concern, whereas reorganization is the financial restructuring of a struggling firm to attempt to continue operations as a going concern. T/F
True
MM Proposition 1, if there are no taxes, states the value of the firm does not depend whatsoever on its capital structure. T/F
True
Only about 40% of S&P 500 companies pay dividends. T/F
True
Share repurchases have become more common over the past half century, and over the same period, the dividend yield has trended downward. T/F
True
Shortage costs typically decrease with the level of investment in current assets. T/F
True
Sources of cash always involve increasing a liability or equity account, or decreasing an asset account (other than cash); for example, decreasing fixed assets by selling some property, plant, and equipment, is considered a source of cash. T/F
True
Stock options traded on exchanges are a zero-sum game, meaning that whatever the buyer of a stock option makes, the writer or seller loses, and vice versa. T/F
True
The advertisement, commonly found in financial newspapers, that announces a public offering of securities and provides the name of the underwriters is called a tombstone. T/F
True
The direct fees paid by the issuer to the underwriter syndicate is called the spread, which is the difference between the price the issuer receives and the offer price paid by new shareholders. T/F
True
The dividend yield on the S&P500 has been approximately 2% in recent decades, and tends to be lower when prices rise. T/F
True
The evidence of indebtedness in an open account is the invoice. T/F
True
The income from investing excess cash in T-Bills is exempt from all state taxes, but the income from investing it in munis is exempt from all federal taxes. T/F
True
The legal document that is provided to potential investors and describes a new security offering is called a prospectus. T/F
True
The optimal credit policy for a firm depends on many specific factors, but generally involves trading off the cost of granting credit, such as the carrying costs of receivables and the possibility of non-payment, against the benefits in terms of increased sales. T/F
True
The preliminary document provided to potential investors for their review of new shares to be issued as they wait for the shares to be cleared for sale is called a red herring. T/F
True
Under bankruptcy, trade creditors have lower priority than secured bank loans. T/F
True
When a company repurchases its shares using proceeds from new issues of debt, its future expected earnings per share increases. T/F
True
erms of sale "2/10 net 45" indicates a 2% discount if paid within 10 days, with the total amount due in 45 days if the discount is not taken. T/F
True
A.B. Securities assists issuers by pricing and selling new securities to the general public. Which one of the following terms best fits the role that A. B. Securities is playing?
Underwriter
Which one of the following is minimized when the value of a firm is maximized?
WACC
When is a firm insolvent from an accounting perspective?
When the firm has a negative net worth
Which one of the following statements correctly describes your situation if you have purchased and continue to hold of an American-style call option?
You have a right to buy on or before the expiration date.
M&M Proposition II, without taxes, states that the:
cost of equity increases as a firm increases its debt-equity ratio.
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:
homemade leverage.
A prepack:
is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan.
The owner of a put option has the _____ an asset at a fixed price during a stated period of time.
right to sell
Which one of the following describes the intrinsic value of a call option?
the stock price minus the strike price or zero, whichever is greater
