corp finance final
A small stock dividend is defined as a stock dividend of less than _____%.
20 to 25
In a typical deal, the venture capitalist will receive at least ______ of the equity of the deal.
40%.
An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?
A. Insiders can sell their shares or cash out B. Generate cash to pay down bank indebtedness C. To establish a market value for the equity and provide funds for operations
Corporations are allowed to use the shelf registration method if they:
A. are rated investment grade and have aggregate market stock value of more than $150 million. B. have not violated the 1934 Securities Act in the past 12 months. C. have not defaulted on its debt in the past 3 years.
The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer. Investment bankers maintain their reputation by:
A. certifying the issue. B. monitoring the issuing firm's management and performance. C. pricing issues fairly.
Types of dilution include:
A. dilution of percentage ownership B. dilution of market share C. dilution of book value and earnings per share D. dilution of percentage ownership and dilution of book value and earnings per share
Investment banks perform which of the following services for corporate issuers:
A. formulating the method used to issue the securities. B. pricing the new securities. C. selling the new securities.
Characteristics of a sensible dividend policy include:
A. over time pay out all free cash flows B. set the current regular dividend consistent with a long-run target payout ratio C. use repurchases to distribute transitory cash flow increases D. over time pay out all free cash flows and set the current regular dividend consistent with a long-run target payout ratio
Using APV, the analysis can be tricky in examples of:
A. tax subsidy to debt. B. interest subsidy. C. flotation costs.
In a leveraged buyout, the equity holders expect a successful buyout if:
A. the firm generates enough cash to serve the debt in early years. B. the company can be taken public or sold in 3 to 7 years. C. the company is attractive to buyers as the buyout matures.
Arguments to explain why most equity issues are underwritten versus sold through a rights offering are:
A. underwriters buy at an agreed upon price and bear some risk of selling the issue. B. cash proceeds are available sooner in underwriting and the issue is available to a wider market. C. investment bankers can provide market advice and certify the issue for potential investors.
If a project's debt level is known over the life of the project, one should use
APV
What are the three standard approaches to valuation under leverage?
APV, FTE, and WACC
Which capital budgeting tools, if properly used, will yield the same answer?
APV, WACC, and Flow to Equity
Which of the following is not one of the four main functions that underwriters provide?
Auditing the financial statements
Although the three capital budgeting methods are equivalent, they all can have difficulties making computation impossible at times. The most useful methods or tools from a practical standpoint are:
Both WACC because projects have constant risk and target debt to value ratios; and Flow-to-equity, because of constant risk and the knowledge that managers think in terms of optimal debt to equity ratios.
The first public equity issue that is made by a company is referred to as:
Both an initial public offering and an unseasoned issue.
The green shoe option is used to:
Both cover oversubscription and cover excess demand.
Arguments against the use of the shelf-registration are:
Both less current information available to investors might raise the cost of debt; and possible market overhang from future issues depressing price.
Underpricing can possibly be explained by:
Both oversubscription of an issue and strong demand by investors.
Corporations use the shelf registration method of security sales because:
Both preregistered securities can be quickly brought to market; and the main registration process is eliminated for up to two years.
Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if:
Both the issue is for less than $5,000,000; and insiders sell no more than $1,500,000 of stock.
A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if:
Both the loan matures within 9 months and the issue is less than $5.0 million.
Which of the following are guidelines for the three methods of capital budgeting with leverage?
Both use APV if project's level of debt is known over the life of the project; and use FTE or WACC if the firm's target debt-to-value ratio applies to the project over its life.
An appropriate guideline to adopt when determining the valuation formula to use is:
Both use APV if the project is far different from scale enhancing; and use WACC if the project is close to being scale enhancing.
Of the following factors, which one is considered to be the primary factor affecting a firm's dividend decision?
Consistent dividend policy
Which of the following lists events in chronological order from earliest to latest?
Declaration date, ex-dividend date, date of record.
A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at various prices. This process is called a:
Dutch auction.
Which of the following are factors that favor a high dividend policy? I. Stockholders desire for current income II. Tendency for higher stock prices for high dividend paying firms III. Investor dislike of uncertainty IV. High percentage of tax-exempt institutional stockholders
I, II, III, and IV
Which of the following may tend to keep dividends low? I. A state law restricting dividends in excess of retained earnings II. A term contained in bond indenture agreements III. The desire to maintain constant dividends over time IV. Flotation costs
I, II, III, and IV
If you ignore taxes and transaction costs, a stock repurchase will: I. reduce the total assets of a firm. II. increase the earnings per share. III. reduce the PE ratio more than an equivalent stock dividend. IV. reduce the total equity of a firm.
I, II, and IV only
Which of the following are valid reasons for a firm to reduce or eliminate its cash dividends? I. The firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or higher. II. A firm has just received a patent on a new product for which there is strong market demand and it needs the funds to bring the product to the marketplace. III. The firm can raise new capital easily at a very low cost. IV. The tax laws have recently changed such that dividends are taxed at an investor's marginal rate while capital gains are tax exempt.
I, II, and IV only
Which of the following tend to increase the appeal of a firm's stock to the average investor? I. A cessation of dividends by a firm which has a long history of increasing dividends II. The distribution of a special dividend by a dividend-paying firm III. A reverse stock split for a low-priced stock IV. The declaration of a stock dividend by a growth firm
II, III, and IV only
Leslie purchased 100 shares of GT, Inc. stock on Wednesday, June 7th. Marti purchased 100 shares of GT, Inc. stock on Thursday, July 8th. GT declared a dividend on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information?
Leslie is entitled to the dividend but Marti is not.
Which of the following is not normally an example of the services offered by investment bankers?
Offering checking accounts to corporations
The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:
The investment policy is set before the dividend decision and not changed by dividend policy.
Which of the following statements is true?
The subscription price is generally below the old stock price.
Which one of the following is an argument in favor of a low dividend policy?
The tax on capital gains is deferred until the gain is realized.
If the WACC is used in valuing a leveraged buyout, the:
WACC must be recalculated as the debt is repaid and the cost of capital changes.
An equity issue sold directly to the public is called:
a general cash offer.
. What is the definition of a syndicate?
a group of underwriters sharing the risk of selling a new issue of securities
A registration statement is effective on the 20th day after filing unless:
a letter of comment suggesting changes is issued by the SEC.
An equity issue sold to the firm's existing stockholders is called:
a rights offer.
A shareholder who has rights is:
able to exercise their rights or sell them.
If a shareholder or investor wants to acquire new stock under a rights plant they must:
acquire the correct rights per share desired, then turn the rights and the total subscription price into the subscription agent.
To calculate the adjusted present value, one will:
add the additional effects of financing to the all equity project value.
The weighted average cost of capital is determined by:
adding the weighted average after tax cost of debt to the weighted average cost of equity.
Stock splits are often used to:
adjust the market price of a stock such that it falls within a preferred trading range.
The acronym APV stands for
adjusted present value.
Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing, entrepreneurs give:
an equity position and usually board of director positions.
Companies use tombstone advertisements in the financial press to:
announce the availability of a new issue of a corporate security.
Financial managers:
are reluctant to cut dividends.
The non-market rate financing impact on the APV is:
calculated by the NPV of the loan using both debt rates.
The flow-to-equity approach to capital budgeting is a three step process of:
calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and then discounting the levered cash flows by the cost of equity capital.
Dividends are relevant and dividend policy irrelevant when:
cash dividends are increased for one year while others are held constant, thus causing an increase in stock price, and dividend policy establishes the trade-off between dividends at different dates.
The use of homemade dividends allows stockholders to change the:
cash payout received by selling off shares to receive current dividends or purchasing additional shares with the dividends, as desired.
The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:
clientele effect.
A standby underwriting arrangement provides the:
company with an alternative avenue of sale to ensure success of the rights offering.
In comparison to debt issuance expenses, the total direct costs of equity issues are:
considerably greater.
Discounting the unlevered after tax cash flows by the _____ minus the ______ yields the ________.
cost of capital for the unlevered firm; initial investment; all-equity net present value
The term (B x rb) gives the:
cost of debt interest payments per year.
In calculating the NPV using the flow-to-equity approach the discount rate is the:
cost of equity for the levered firm.
The APV method is comprised of the all equity NPV of a project and the NPV of financing effects. The four side effects are:
cost of issuing new securities, cost of financial distress, tax subsidy of debt and other subsidies to debt financing.
The date on which the firm mails out its declared dividends is called the:
date of payment.
The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:
date of record.
The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.
declaration
In an efficient market, ignoring taxes and time value, the price of stock should:
decrease by the amount of the dividend immediately on the ex-dividend date.
Assuming everything else is constant, when a stock goes ex-rights its price should:
decrease since the stockholder is losing an option.
The flow-to-equity (FTE) approach in capital budgeting is defined to be the:
discounting of the levered cash flows to the equity holders for a project at the required return on equity
Payments made by a firm to its owners from sources other than current or accumulated earnings are called:
distributions.
Payments made out of a firm's earnings to its owners in the form of cash or stock are called:
dividends.
A stock split:
does not affect the total value of any of the equity accounts.
Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally:
drop, perhaps because the new issue reflects management's view that common stock is currently overvalued.
In a best efforts offering the investment banker makes their money primarily by:
earning a commission on each share sold.
The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the _____ date.
ex-dividend
All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend on the:
ex-dividend date.
Under the _______ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _______ method, the underwriter does not purchase the shares but merely acts as an agent.
firm commitment; best efforts
The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This may result in:
firms accepting some negative NPV all equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV.
For smaller IPOs, direct expenses as a percentage of total proceeds is _______.
greater
An investor is more likely to prefer a high dividend payout if a firm:
has few, if any, positive net present value projects.
Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a:
higher dividend policy.
Venture capitalists will frequently
hold voting preferred stock which will allow them priorities over common stockholders in the event of bankruptcy or liquidation.
The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is called (a):
homemade dividends.
A key difference between the APV, WACC, and FTE approaches to valuation is:
how debt effects are considered; i.e. the target debt to value ratio and the level of debt.
A one-for-four reverse stock split will:
increase a $1 par value to $4.
All else equal, a stock dividend will _____ the number of shares outstanding and _____ the value per share.
increase; decrease
Non-market or subsidized financing ________ the APV ___________.
increases; by increasing the NPV of the loan
The market's reaction to the announcement of a change in the firm's dividend payout is likely the:
information content effect.
During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains:
information very similar to the final prospectus without a price nor with SEC approval.
The first public equity issue made by a company is a(n):
initial public offering.
Venture capitalists are
intermediaries that raise funds from outside investors, play an active role in overseeing, advising, and monitoring the companies in which they invest, and generally do not want to own the investment forever.
From a tax-paying investor's point of view, a stock repurchase:
is more desirable than a cash dividend.
Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all of its available cash to fund its rapid growth. The market price of its stock is currently trading in the middle of its preferred trading range. The firm could consider:
issuing a stock dividend.
If an IPO is underpriced then the:
issuing firm receives less money than it probably should have.
A reverse stock split is sometimes used as a means of:
keeping a firm's stock eligible for trading on a stock exchange.
A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a:
liquidating dividend.
The fact that flotation costs can be significant is justification for:
maintaining a low dividend policy and rarely issuing extra dividends
The information content of a dividend increase generally signals that:
management believes that the future earnings of the firm will be strong.
Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is:
management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital.
Rule 144A provides the framework for the issuance of private securities to qualified institutional investors. To buy private securities, institutional investors:
must be willing to hold a less liquid security and have $100 million under management.
The diagonal listing of investment bankers on tombstone advertisements reflects their ______ relative to the other investment bankers listed below.
prestige
The market for venture capital refers to the:
private financial marketplace for servicing small, young firms.
The APV method to value a project should be used when the:
project's level of debt is known over the life of the project.
Homemade dividends are described by Modigliani and Miller to be the:
re-arrangement of the firm's dividend stream by investors buying or selling their holdings in the stock.
Potential investors learn of the information concerning the firm and its new issue from the:
red herring.
A cash payment made by a firm to its owners in the normal course of business is called a:
regular cash dividend.
A new public equity issue from a company with equity previously outstanding is called a(n):
seasoned equity issue.
A reverse split is when:
several old shares, such as 4, are replaced by 1 new share.
A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders.
share repurchase
A payment made by a firm to its owners in the form of new shares of stock is called a _____ dividend.
stock
An increase in a firm's number of shares outstanding without any change in owners' equity is called a:
stock split.
Wydex, Inc. stock is currently trading at $82 a share. The firm feels that its primary clientele can afford to spend between $2,000 and $2,500 to purchase a round lot of 100 shares. The firm should consider a:
stock split.
Flotation costs are incorporated into the APV framework by:
subtracting them from the all equity value of the project.
A group of investment bankers who pool their efforts to underwrite a security are known as a(n):
syndicate
The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because:
the capital structure is changing.
The key difference between a negotiated offer and a competitive offer is that:
the issuing firm can offer its securities to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used.
A rights offering is:
the issuing of an option directly to the existing shareholders to acquire stock.
Dilution refers to:
the loss in existing shareholder's equity.
The appropriate cost of debt to the firm is:
the market borrowing rate after tax.
In a reverse stock split:
the number of shares outstanding decreases but owners' equity is unchanged.
The six components that make up the total costs of new issues are:
the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option.
To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price:
the subscription price and the number of rights needed to acquire a new share.
The last date on which you can purchase shares of stock and still receive the dividend is the date _____ business day(s) prior to the date of record.
three
Management's first step in any issue of securities to the public is:
to obtain approval from the board of directors.
The difference between the highest and lowest prices at which a stock has traded is called its:
trading range.
In order to value a project which is not scale enhancing you need to:
typically calculate the equity cost of capital using the risk adjusted beta of another firm in the industry before calculating the WACC.
Empirical evidence suggests that new equity issues are generally:
underpriced, in part, to counteract the winner's curse.
The value of a corporation in a levered buyout is composed of which following four parts:
unlevered cash flows and interest tax shields during the debt paydown period, unlevered terminal value and interest tax shields after the paydown period.
Professor Jay Ritter found best-efforts offerings are:
used with small IPO issues.
A firm commitment arrangement with an investment banker occurs when:
when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.
On the date of record the stock price drop is:
zero because it happens on the ex-dividend date.
