F305

1. _____ risk is the type of equity risk related to a firm's capital structure policy

a. Financial

1. An investor is more likely to prefer a high dividend payout if that investor:

a. Is a corporation

1. The value of a firm is maximized when:

a. WACC is minimized

1. Which one of the following statements is accurate

The optimal capital structure maximizes shareholder value

1. A small stock dividend is defined as a stock dividend of less than____ percent

a. 20-25

1. Which of the following is a direct result for a 2-1 split

a. A 50% decrease in the par value per share

1. Which one of the following statements to stock repurchases is correct

a. A company may spend more cash over the course of a year on stock repurchases than it does on cash dividends

1. M&M Proposition I with no tax supports the argument that

a. A company's debt-equity ratio is completely irrelevant

1. M&M Proposition II, without taxes, is the proposition that:

a. A componay's cost of equity is a linear function with a slope equal to (Ra-Rd)

1. Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

a. A decrease in the firm's beta

1. A firm should select the capital structure that:

a. Maximizes the value of the firm

1. The ex-dividend is ___ business day(s) prior to the date of record

a. One

1. Which one of the following is a result of a stock repurchase?

a. PE ratio is equal to that resulting from a comparable cash dividend

1. Which of the following is a direct cost of bankruptcy?

a. Paying an outside accountant to prepare bankruptcy reports

1. A small stock dividend

a. Reduces retained earnings by the market price of each share issued

1. A large stock dividend

a. Reduces retained earnings by the par value of each share

1. Wagner Resources was unable to meet its financial obligations, Its creditors forced it into using legal proceedings to restructure itself so that it could continue as a viable business. The process this company underwent is known as a:

a. Reorganization

1. Eleanor invested in Hwajin stock when the company was unlevered. Since then, Hwajin has changed its capital structure and now has a debt-equity ratio of .42. To unlever her position, Eleanor needs to:

a. Sell 42 percent of her shares of Hwanji stock and lend out the sale proceeds

1. A(n) _____ dividend is considered to be a one-time event that will not be repeated

a. Special

1. Which one of the following favors a low dividend policy

a. The tax on capital gains is deferred until the gain is realized

1. A reverse stock split is defined as:

a. A decrease in the number of shares outstanding without affecting total owners' equity

1. Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

a. A decrease in the risk free rate

1. Which of the following statements related to cash dividends is correct

a. A dividend is never a liability of the issuer until it has been declared

1. Stock spilts can be used to:

a. Adjust the market price of a stock so it falls within a preferred trading range

1. The diddend market is in equilibrium when:

a. All clienteles are satisfied

1. Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Ignore taxes

a. At the breakeven point, there is no advantage to debt

1. Which one of the following is the best justification for a reverse stock split

a. Avoid delisting

1. Raine owns 1,600 shares of LP Gas stock which she purchased six years ago at a price of $18 per share. Today, these shares are selling for $26 each. Assume a tax rate of 20 percent applies to both dividend income and capital gains received by individuals. Ignore costs. Given this hypothetical assumption, from Raine's point of view a stock repurchase today would:

a. BE more desirable than a cash dividend in respect to taxes

1. Delaney purchased 500 shares of Upriver Tours stock on Wednesday, July 7. Edward purchased 100 shares of Upriver Tours stock on Thursday, July 8. Upriver Tours declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information?

a. Both Edward and Delaney are entitled to the dividend

1. _____ risk is the type of equity that is most related to the daily operations of a firm

a. Business

1. The common stock of Battle Gaming has historically had a low dividend yield, and that circumstance is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to as the _____ effect.

a. Clientele

1. Which of these statements related to Chapter 11 bankruptcy is accurate?

a. Companies sometimes file for chapter 11 in an attempt to gain a competitive advantage

1. According to pecking- order theory

a. Companies stockpile internally generated cash

1. Ignoring taxes, at the breakeven point between a levered and an unlevered capital structure:

a. Company is earning just enough to pay for the cost of debt

1. The xistence of ____ tends to increase the cash dividends a firm chooses to pay

a. Corporate investors

1. Wright Market Research is able to borrow money at a rate of 6.8% per year. This interest rate is called the

a. Cost of debt

1. Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:

a. Cost of equity

1. Which one of the following dates is used to determine which shareholders will receive a dividend payment

a. Date of record

1. The optimal Capital structure has been achieved when the:

a. Debt-equity ratio results in the lowest possible WACC

1. The board of directors of Poole met this afternoon and passed a resolution to pay a cash dividend of $.96 per share next month. In relation to this dividend, today is referred to as which one of the following dates?

a. Declaration Date

1. A $1.28 quarterly cash payment paid by Dattam, Incorporated, to its shareholders in the normal course of business becomes a liability of the company on the:

a. Declaration date

1. Based on M&M I with taxes, the WACC:

a. Decreases as the debt-equity ration increases

1. A stock split:

a. Decreases the market value of each share

1. Financial Risk is::

a. Dependent upon a company's capital structure

1. The explicit costs, such as legal and administrative expensives, associated with company default are classified as ______ costs:

a. Direct bankruptcy

1. Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is:

a. Directly related to the risk level of its firm

1. Price & Battisti just paid $2.40 per share to its shareholders. The cash for these payments did not come from the firm's earnings; instead, the cash came from selling certain assets of the firm. What are these payments to shareholders called?

a. Distributions

1. Which one of the following is a marketed claim against the cash flows of a company

a. Dividend payment to shareholders

1. Which one of the following staements is correct

a. Dividend payments are highly concentrated in a relatively small set of large companies

1. Globe hotels has more cash on hand than is required to support its operations. Accordingly, the company has decided to payout some of its earnings in the form of cash to its shareholders. What are these payments to shareholders called?

a. Dividends

1. Which one of the following statements appears to be supported by the current dividend policies of US industrial firms

a. Dividends are still viewed by shareholders as a signal of a company's future outlook

1. Which of the following statements related to dividend policy is correct

a. Dividned policy focusses on the timing of dividend payments

1. According to the static theory of capital structure, the optimal capital structure for a company:

a. Equates marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt

1. All else equal, on the ________, the market value of a stock will tend to decrease by roughly the aftertaxvalue of the dividend.

a. Ex-dividend date

1. M&M Proposition II with taxes:

a. Has the same general implications as M&M Proposition II without taxes

1. Which one of the following tends to decrease the ability of a shareholder to create his or her own homemade dividend policy

a. High transaction fees

1. Which of the following refers to the ability of shareholders to undo a company's dividend policy and create and alternative dividend policy by reinvesting dividends or selling shares of stock

a. Homemade dividend

1. The existance of _____ makes the capital structure of a company irrelevant

a. Homemade leverage

1. Bankruptcy:

a. IS a legal proceeding

1. Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity:

a. IS dependent upon the reliable estimate of the market risk premium

1. Which of the following is a result of a small stock dividend

a. Increase in the common stock account balance

1. If you ignore taxes and costs, a stock repurchase will:

a. Increase the earnings per share

1. In an effort to avoid bankruptcy, a firm may incur certain costs, called _____ costs

a. Indirect bankruptcy

1. By increasing its interest expense by $2500 last year, Bishara Foods was able to reduce its taxes by $525. This amount is called:

a. Interest tax shield

1. According to the pecking-order theory, firms prefer to use ____ before any other form of financing

a. Internal funds

1. Homemade leverage is employed when a(n) _____:

a. Investor uses debt to change his or her exposure to financial leverage

1. Assume a firm has a debt-equity ratio of .36. The firm's cost of equity

a. Is affected by both a change in the firm's beta and the firm's projected rate of growth

1. A stock repurchase program:

a. Is essentially the same as a cash dividend program provided thewre are no taxes or other costs

1. The business risk of a company:

a. Is positively related to the company's cost of equity

1. Which of the following statements regarding a firm's pretax cost of debt is accurate?

a. It is based on the current yield to maturity of the company's outstanding bonds

1. A company is technically insolvent when

a. Its unable to meet its financial obligations

1. The concept of homemade leverage is most associated with:

a. M&M Proposition 1 with no tax

1. According to ____, the value of a company is unrelated to its capital structure

a. M&M Proposition I, no tax

1. According to _____, the cost of equity capital is directly and proportionally related to capital structure

a. M&M Proposition II

1. The capital structure that maximizes the value of a company also:

a. MAximizess the cost of capital

1. Which one of the following staements is correct

a. Maintaining a steady dividend is a key goal of most dividend paying companies

1. The fact that flotation costs can be significant is an argument for :

a. Maintaining low dividend policy and rarely uses extra dividends

1. The information content of a dividend increase generally signals

a. Management believes earnings growth will be strong going forward

1. The optimal capital structure of a company:

a. Maximizes the value of that company's marketed claims

1. Revol-Tech is a technology company with excellent growth prospects. The company 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 the stock is currently trading at the upper end of its preferred trading range. The company is most apt to consider which one of the following in this situation?

a. Stock Split

1. Which one of the following involves a payment in shares that increases the number of shareholder owns but also decreases the value per share

a. Stock dividends

1. Triinh corporation has excess cash and has opted to buy some of its outstanding shares. What is this process called

a. Stock repurchase

1. Which one of the statements related to stock repurchases is correct

a. Stock repurchases can be a relatively tax efficient method of distributing cash to shareholders

1. Which one of the following statements related to stock repurchases is correct

a. Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders

1. Which one of the following does not affect the total equity of a company but does increase the number of shares outstanding

a. Stock split

1. What is the information content effect

a. The financial market's reaction to a change in the amount of a company's dividend

1. A company that has a(n) ______ would be the most likely to have a high percentage of debt in its optimal capital structure

a. The low probability of financial distress

1. The interest tax shield is a key reason why:

a. The net cost of debt is generally less than the cost of equity

1. According to M&M Proposition II, without taxes, which of the following statements is accurate?

a. The required return on assets is equal to the weighted average cost of capital

1. According to _____, a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs

a. The static theory of Capital structure

1. The basic lesson of M&M theory, is that the value of a company is dependent upon:

a. The total cash flows of that company

1. M&M Proposition I with taxes is based on the concept that:

a. The value of a taxable company increases as the level of debt increases

1. On Friday, March 4, Kufours announced it would pay a dividend of $.63 per share on Friday, April 1. The ex-dividend date is Wednesday, March 23. What is the date of record?

a. Thursday, March 24

1. Hasan Electric declared a dividend of $.48 per share on Monday, October 18. The dividend will be paid on Monday, November 15, to shareholders of record on Friday, October 29. Which one of the following is the ex-dividend date?

a. Thursday, October 28

1. The last date on which you can purchase shares of stock and still receive the next dividend is the date that is _____ business day(s) prior to the date of record.one

a. Two

1. Which of the following statements related to chapter 7 bankruptcy is correct?

a. Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated

1. If a company has the optimal amount of debt, then the:

a. Value of the levered company will exceed the value of the unlevered company

1. M&M Proposition I with tax implies that the

a. WACC decreases as the D/E ratio increases

1. The optimal capital structure:

a. Will vary over time as taxes and market conditions change