Corporate Finance - Final

Which of the following statements is false? In perfect capital markets: - Holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price. - When a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. - An open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. - Investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own

An open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead

Which of the following questions is FALSE? - Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. - If the acquirer purchases the target assets directly (rather than the target stock), then it can step up the book value of the target's assets to the purchase price. - How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. - In a friendly takeover, the target board of directors supports the merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote.

Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders

Which of the following statements is​ FALSE? - Two key qualitative factors determine the present value of financial distress​ costs: (1) the probability of financial distress and​ (2) the magnitude of the costs after a firm is in distress. - Technology firms are likely to incur high costs when they are in financial​ distress, due to the potential for loss of customers and key​ personnel, as well as a lack of tangible assets that can be easily liquidated. - The magnitude of the financial distress costs will depend on the relative importance of the sources of these costs and is likely to vary by industry. - Calculating the precise present value of financial distress costs is a relatively straightforward process.

Calculating the precise present value of financial distress costs is a relatively straightforward process

The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the -

Dividend Puzzle

The company states the number of shares it will buy during a stipulated period, and sets a price range between which shareholder bids will be accepted -

Dutch Auction share repurchase

The firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price -

Dutch Auction share repurchase

The fact that a large company can enjoy savings from producing goods in high volume, that are not available to a small company is called _________

Economies of scale

Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. True or False

False

Calculating the precise present value of financial distress costs is a relatively straightforward process. True or False

False

Firms adjust dividends relatively infrequently, and dividends are much less volatile than earnings. This practice of maintaining relatively constant dividends is called dividend signaling. True or False

False

Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases. True or False

False

In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. True or False

False

Individuals in the highest tax brackets have a preference for stocks that pay high dividends, whereas tax-free investors and corporations have a preference for stocks with no or low dividends. True or False

False

The costs of financial distress reduce the value of the levered firm, VL. The amount of the reduction decreases with the probability of default, which in turn increases with the level of the debt D. True or False

False

When a firm issues new shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalization. True or False

False

Whether default occurs depends on the cash flows, not on the relative values of the firm's assets and liabilities. True or False

False

While ownership is often dilluted for small, young firms, ownership typically becomes concentrated over time as a firm grows. True or False

False

Which of the following statements is FALSE? - Firms adjust dividends relatively infrequently, and dividends are much less volatile than earnings. This practice of maintaining relatively constant dividends is called dividend signaling. - When a firm increases its dividend, it sends a positive signal to investors that management expects to be able to afford the higher dividend for the foreseeable future. - The average size of the stock price reaction increases with the magnitude of the dividend change, and is larger for dividend cuts. - When managers cut the dividend, it may signal that they have given up hope that earnings will rebound in the near term and need to reduce the dividend to save cash.

Firms adjust dividends relatively infrequently, and dividends are much less volatile than earnings. This practice of maintaining relatively constant dividends is called dividend signaling

Which of the following statements is FALSE? - Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases. - When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. - The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all. - When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.

Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pretax return as firms that use share repurchases

A firm may decide to eliminate the threat of a takeover by a major shareholder by purchasing shares from him at a premium -

Greenmail

Which of the following statements is FALSE? - The dividend-capture theory states that absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend. - Individuals in the highest tax brackets have a preference for stocks that pay high dividends, whereas tax-free investors and corporations have a preference for stocks with no or low dividends. - Differences in tax preferences create clientele effects, in which the dividend policy of a firm is optimized for the tax preference of its investor clientele. - To compare investor preferences, we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor.

Individuals in the highest tax brackets have a preference for stocks that pay high dividends, whereas tax-free investors and corporations have a preference for stocks with no or low dividends

The share price falls when a dividend is paid because the reduction in cash decreases the ...

Market value of assets

A(n) ________ is the most common way that firms repurchase shares -

Open market share repurchase

When a firm repurchases shares, the supply of shares is ________, but at the same time, the firm's assets ________.

Reduced, Decline

When target shareholders exchange their old stock for new stock in the acquiring firm, this is known as a(n):

Stock Swap

When target shareholders exchange their old stock for new stock in the acquiring firm, this is known as a(n): - Stock swap - Stock exchange - Exchange swap - Term swap

Stock Swap

A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price -

Targeted Repurchase

When a firm purchases shares directly from a major shareholder -

Targeted repurchase

A firm can repurchase shares through a(n) ______ in which it offers to buy shares at a prespecified price during a short time period, generally within 20 days. - Dutch auction share repurchase - Tender offer - Targeted repurchase - Open market share repurchase

Tender Offer

A public bid for stockholders to sell their stock -

Tender offer

When a firm offers to buy its shares at a prespecified price during a short time period -

Tender offer

Which of the following statements is FALSE? - Firms with steady, reliable cash flows, such as utility companies, are able to use high levels of debt and still have a very low probability of default. - If there were no costs of financial distress, the value of the firm would continue to increase with increasing debt until the interest on the debt exceeds the firm's earnings before interest and taxes and the tax shield is exhausted. - The costs of financial distress reduce the value of the levered firm, VL. The amount of the reduction decreases with the probability of default, which in turn increases with the level of the debt D. - The tradeoff theory states that firms should increase their leverage until it reaches the level D* for which VL is maximized.

The costs of financial distress reduce the value of the levered firm, VL. The amount of the reduction decreases with the probability of default, which in turn increases with the level of the debt D.

A serious concern for large corporations is that managers may make large, unprofitable investments. True or False

True

An important consequence of leverage is the risk of bankruptcy. True or False

True

By choosing positive-NPV projects that are worth more than their initial investment, the firm can enhance its value. True or False

True

Differences in tax preferences create clientele effects, in which the dividend policy of a firm is optimized for the tax preference of its investor clientele. True or False

True

Economic distress is a significant decline in the value of a firm's assets, whether or not it experiences financial distress due to leverage. True or False

True

Firms with steady, reliable cash flows, such as utility companies, are able to use high levels of debt and still have a very low probability of default. True or False

True

Holding fixed the cash flows generated by the firm's assets, however, the choice of capital structure does not change the value of the firm. True or False

True

How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. True or False

True

If the acquirer purchases the target assets directly (rather than the target stock), then it can step up the book value of the target's assets to the purchase price. True or False

True

If there were no costs of financial distress, the value of the firm would continue to increase with increasing debt until the interest on the debt exceeds the firm's earnings before interest and taxes and the tax shield is exhausted. True or False

True

In a friendly takeover, the target board of directors supports the merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote. True or False

True

In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. True or False

True

In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the cum-dividend price if a dividend were paid instead. True or False

True

In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price. True or False

True

In perfect capital markets, if a firm invests excess cash flows in financial securities, the firm's choice of payout versus retention is irrelevant and does not affect the initial share price. True or False

True

In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own. True or False

True

MM Proposition I applies to capital structure decisions made at any time during the life of the firm. True or False

True

Modigliani and Miller's results continue to hold in a perfect market even when debt is risky and the firm may default. True or False

True

Some financial economists explain a manager's willingness to engage in negative-NPV investments as empire building. True or False

True

Technology firms are likely to incur high costs when they are in financial distress, due to the potential for loss of customers and key personnel, as well as a lack of tangible assets that can be easily liquidated. True or False

True

The average size of the stock price reaction increases with the magnitude of the dividend change and is larger for dividend cuts. True or False

True

The dividend-capture theory states that absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend. True or False

True

The magnitude of the financial distress costs will depend on the relative importance of the sources of these costs and is likely to vary by industry. True or False

True

The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all. True or False

True

The tradeoff theory states that firms should increase their leverage until it reaches the level D* for which VL is maximized. True or False

True

To compare investor preferences, we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor. True or False

True

Two key qualitative factors determine the present value of financial distress costs: (1) the probability of financial distress and (2) the magnitude of the costs after a firm is in distress. True or False

True

When a firm increases its dividend, it sends a positive signal to investors that management expects to be able to afford the higher dividend for the foreseeable future. True or False

True

When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. True or False

True

When managers cut the dividend, it may signal that they have given up hope that earnings will rebound in the near term, and so they need to reduce the dividend to save cash. True or False

True

When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends. True or False

True

While overspending on personal perks may be a problem for large firms, these costs are likely to be small relative to the overall value of the firm. True or False

True

Which of the following statements is FALSE? - When a firm issues new shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalization. - MM Proposition I applies to capital structure decisions made at any time during the life of the firm. - By choosing positive-NPV projects that are worth more than their initial investment, the firm can enhance its value. - Holding fixed the cash flows generated by the firm's assets, however, the choice of capital structure does not change the value of the firm.

When a firm issues new shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalization

Which of the following statements is FALSE? - An important consequence of leverage is the risk of bankruptcy. - Modigliani and Miller's results continue to hold in a perfect market even when debt is risky and the firm may default. - Whether default occurs depends on the cash flows, not on the relative values of the firm's assets and liabilities. - Economic distress is a significant decline in the value of a firm's assets, whether or not it experiences financial distress due to leverage.

Whether default occurs depends on the cash flows, not on the relative values of the firm's assets and liabilities

Which of the following statements is FALSE? - While overspending on personal perks may be a problem for large firms, these costs are likely to be small relative to the overall value of the firm. - A serious concern for large corporations is that managers may make large, unprofitable investments. - While ownership is often dilluted for small, young firms, ownership typically becomes concentrated over time as a firm grows. - A serious concern for large corporations is that managers may make large, unprofitable investments.

While ownership is often dilluted for small, young firms, ownership typically becomes concentrated over time as a firm grows

Homemade dividend refers to the process by which an investor -

can sell shares to create a dividend policy to suit his preferences

Share repurchases have a tax advantage over dividends because -

capital gains can be deferred by long-term investors