FIN 302 Final

You own 400 shares of stock of Fresh Face. The company plans to pay a dividend of $.65 in Year 1 and a final liquidating dividend of $28.50 per share in Year 2. The required return is 15.6 percent. If you only want $200 total in dividends in the first year, what will be your homemade dividend in the second year? $12,696 $11,469 $11,402 $10,764 $12,878

$11,469 D1 = 400($.65) D1 = $260 P1 = $28.50/1.156 P1 = $24.654 Number of shares = ($260 − 200)/$24.654 Number of shares = 2.434 D2 = $28.50(400 + 2.434) D2 = $11,469 D1 = 400($.65) D1 = $260 P1 = $28.50/1.156 P1 = $24.654 Number of shares = ($260 − 200)/$24.654 Number of shares = 2.434 D2 = $28.50(400 + 2.434) D2 = $11,469

Southern Wind is an all-equity firm with 18,500 shares of stock outstanding and a total market value of $356,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $28,000 if the economy is normal, $15,600 if the economy is in a recession, and $40,400 if the economy booms. Ignore taxes. Management is considering issuing $89,200 of debt with an interest rate of 6 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy booms? $2.17 $2.53 $2.92 $2.74 $1.63

$2.53 Shares repurchased = $89,200/($356,000/18,500) Shares repurchased = 4,635.39 shares Shares outstanding = 18,500 shares − 4,635.39 shares Shares outstanding = 13,864.61 shares EPS = [$40,400 − 89,200(.06)]/13,864.61 EPS =$2.53

Brick House Cafe has a tax rate of 21 percent and paid total taxes of $42,500. The company had an interest expense of $18,900. What was the value of the interest tax shield? $12,280 $3,969 $17,680 $17,000 $8,247

$3,969 Interest tax shield = .21($18,900) Interest tax shield = $3,969

Globe Travel is acquiring Ticket Systems for $52,500 in cash. Globe Travel has 3,000 shares of stock outstanding at a market price of $38 per share. Ticket Systems has 2,100 shares of stock outstanding at a market price of $24 per share. Neither firm has any debt. The incremental value of the acquisition is $1,700. What is the price per share of Globe Travel after the acquisition? $39.29 $36.92 $37.30 $39.19 $37.87

$37.87 Price per share = [3,000($38) + 2,100($24) + $1,700 − 52,500]/3,000 Price per share = $37.87 Price per share = [3,000($38) + 2,100($24) + $1,700 − 52,500]/3,000 Price per share = $37.87

The stock of Red's Hardware closed at $58.10 per share today. Tomorrow morning, the stock goes ex-dividend, paying a dividend of $1.90 per share. The tax rate on dividends is 25 percent. All else the same, what price will the stock open at tomorrow morning? $58.10 $57.15 $56.20 $56.68 $57.63

$56.68 Aftertax dividend = $1.90(1 − .25) Aftertax dividend = $1.43 Ex-dividend price = $58.10 − 1.43 Ex-dividend price = $56.68 Aftertax dividend = $1.90(1 − .25) Aftertax dividend = $1.43 Ex-dividend price = $58.10 − 1.43 Ex-dividend price = $56.68

Kelso Electric is an all-equity firm with 47,750 shares of stock outstanding. The company is considering the issue of $325,000 in debt at an interest rate of 7 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 29,500 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans? $51,021 $64,484 $36,774 $41,371 $59,524

$59,524 EBIT/47,750 = [EBIT − $325,000(.07)]/29,500 EBIT = $59,524

Turquoise Door has acquired The Portal in a merger transaction. The pre-merger balance sheet for Turquoise Door has current assets of $1,500, other assets of $400, net fixed assets of $2,300, current liabilities of $1,000, long-term debt of $500, and owners' equity of $2,700. The pre-merger balance sheet for The Portal shows current assets of $600, other assets of $210, net fixed assets of $1,600, current liabilities of $500, and equity of $1,910. Assume the merger is treated as a purchase for accounting purposes. The market value of The Portal's fixed assets is $2,900; the market values for current and other assets are the same as the book values. Assume that Turquoise Door issues $4,000 in new long-term debt to finance the acquisition. The post-merger balance sheet will reflect goodwill of ________ and total equity of ________. $790; $2,700 $890; $2,700 $790; $4,610 $640; $2,700 $890; $4,610

$790; $2,700 Goodwill = $4,000 − 2,900 − 600 − 210 + 500 Goodwill = $790 Post-merger equity = Equity of acquiring firm Post-merger equity = $2,700 Goodwill = $4,000 − 2,900 − 600 − 210 + 500 Goodwill = $790 Post-merger equity = Equity of acquiring firm Post-merger equity = $2,700

Jumpstart Our Business Startups (JOBS) Act

-signed into law on April 5, 2012 -A provision allows companies to raise money by selling equity through crowdfunding -Originally, JOBS Act allowed a company to issue up to $1 million in securities in a 12-month period, but this limit was later raised to a maximum of $50 million

Basic procedure involved in issuing securities is as follows:

1.Management must obtain approval from board of directors 2.Firm must prepare a registration statement, a statement filed with the SEC that discloses all material information concerning the corporation making a public offering 3.SEC examines registration statement during a waiting period, during which time the firm may distribute copies of a preliminary prospectus, a legal document describing details of the issuing corporations and the proposed offering to potential investors 4.Firm cannot sell securities during waiting period, but oral offers can be made 5.On effective date of registration statement, a price is determined and a full-fledged selling effort gets underway

Weiland, Incorporated, has 280,000 shares outstanding that sell for $78 per share. The company plans a 4-for-3 stock split. How many shares will be outstanding after the split? 1,166,667 shares 373,333shares 1,960,000 shares 210,000 shares 93,333 shares

373,333shares

tokens

A company can also raise funds by selling tokens, which often grant the holder the right to use the company's service in the future

White Knight Transaction

A firm facing an unfriendly merger offer might arrange to be acquired by a different, friendly firm.

Rights Offer

An issue of common stock offered to existing stockholders

Countertender Offer

Better known as the "Pac-Man" defense, the target responds to an unfriendly overture by offering to buy the bidder

gross spread

Difference between the underwriter's buying price and the offering price, representing compensation to underwriter, is the gross spread

Homemade Dividends

Idea that individual investors can undo corporate dividend policy by reinvesting dividends or selling shares of stock

initial coin offering

Initial sale of a token on a digital currency platform is often called an initial coin offering or ICO

Which one of the following is a result of a stock repurchase? Increase in the total equity of the repurchasing firm Increase in the market price per share Decrease in EPS PE ratio equal to that resulting from a comparable cash dividend Increase in the number of shares outstanding

PE ratio equal to that resulting from a comparable cash dividend

Which one of the following generally has a flip-in provision that significantly increases the cost to a shareholder who is attempting to gain control over a firm? Greenmail Standstill agreement Golden parachute White knight Poison pill

Poison pill

Dual-Class Capitalization

Some firms have more than one class of common stock and that voting power is typically concentrated in a class of stock not held by the public

golden parachute

Some target firms provide compensation to top-level managers if a takeover occurs

gross spread

The difference between the underwriting price received by the issuing company and the actual price offered to the public.

Dutch Auction Underwriting

The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

A personal computer company announced today that it had acquired a hard drive manufacturer. Which type of an acquisition was this? Vertical Longitudinal Horizontal Indirect Conglomerate

Vertical

subsidiary

a company that is completely controlled by another company

Poison Pill

a financial device designed to make unfriendly takeover attempts unappealing, if not impossible

Static theory of capital structure

a firm borrows up to the point where tax benefit from extra dollar in debt equals cost that comes from increased probability of financial distress

syndicate

a group of underwriters formed to share the risk and to help sell an issue

greenmail

a payment by a firm to a hostile party for the firm's stock at a premium, made when the firm's management feels that the hostile party is about to make a tender offer

tender offer

a public offer by one firm to directly buy the shares of another firm

Fair Price Provision

a requirement that all selling shareholders receive the same price from a bidder

registration statement

a statement filed with the SEC that discloses all material information concerning the corporation making a public offering

With Dutch auction underwriting: a) all successful bidders pay the same price per share. b) each winning bidder pays the minimum price offered by any bidder. c) the bidder for the largest quantity receives the first allocation of securities. d) all bidders receive at least a portion of the quantity for which they bid. e) the selling firm receives the maximum possible price for each security sold

a) all successful bidders pay the same price per share.

Lockup Transaction

an option granted to a friendly suitor (a white knight, perhaps) giving it the right to purchase stock or some of the assets (the crown jewels, possibly) of a target firm at a fixed price in the event of an unfriendly takeover

Bear Hug

an unfriendly takeover offer designed to be so attractive that the target firm's management has little choice but to accept it

shark repellent

any tactic (a poison pill, for example) designed to discourage unwanted merger offers

Underwriters

are investment firms that act as intermediaries between a company selling securities and the investing public

Angel investors

are usually individuals who invest their own money, but they tend to focus on smaller deals

According to ________, the value of a company is unrelated to its capital structure. a) the homemade leverage principle b) M&M Proposition I, no tax c) the static theory of capital structure d)M&M Proposition II, no tax e) the pecking-order theory

b) M&M Proposition I, no tax

The raising of small amounts of capital from a large number of people is known as: a) a diversified offer. b) crowdfunding. c) over allocating. d) a rights offering. e) a standby offer.

b) crowdfunding.

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) M&M Proposition II with taxes b) the static theory of capital structure c) the pecking-order theory d) M&M Proposition I with taxes e) the open markets theorem

b) the static theory of capital structure

M&M Proposition I with tax implies that the: a) value of a company is inversely related to the amount of leverage used by that company. b) weighted average cost of capital decreases as the debt-equity ratio increases. c) value of an unlevered company equals the value of a levered company plus the value of the interest tax shield. d) cost of capital is the same regardless of the mix of debt and equity used e) cost of equity increases as the debt-equity ratio decreases.

b) weighted average cost of capital decreases as the debt-equity ratio increases.

Which one of the following statements is accurate? a) Shareholder value is maximized when WACC is also maximized. b) The optimal capital structure occurs when the cost of equity is minimized. c) The optimal capital structure maximizes shareholder value. d) Unlevered firms have more value than levered firms when firms are profitable. e) Capital structure has no effect on shareholder value.

c) The optimal capital structure maximizes shareholder value.

Financing of new, nonpublic companies is broadly referred to as ________ financing. a) stylized b) exit funding c) private equity d) mezzanine-level e) singular-risk

c) private equity

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period. a) auction b) red c) quiet d) Green Shoe e) lockup

c) quiet

shelf registration

company may register all issues it expects to sell within two years at one time, with subsequent sales permitted at any time within those two years

Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation? a) Overallotment b) Red herring allotment c) Green Shoe allocation d) Percentage ownership dilution e) Abnormal event

d) Percentage ownership dilution

The Securities and Exchange Commission: a) publishes red herrings on prospective new security offerings. b) verifies the accuracy of the information contained in the prospectus. c) examines the prospectus during the Green Shoe period. d) reviews registration statements to ensure they comply with current laws and regulations. e) determines the final offer price once they have approved the registration statement.

d) reviews registration statements to ensure they comply with

Financial Distress Costs

direct and indirect costs associated with going bankrupt or experiencing financial distress

prospectus

document issued to possible buyers of a stocks and bonds outlining the financial condition of the company issuing those securities

The Peter Corporation and the Sellers Company have both announced IPOs. You place anorder for 900 shares of each IPO. One of the IPOs is underpriced by $13.75 and the other is overpriced by $6.50. If you could get all of the shares you ordered for each IPO, what would your profit be? a) $12,375.00 b) $5,437.50 c) $18,225.00 d) $5,981.25 e) $6,525.00

e) $6,525.00 Profit = (900 × $13.75) - (900 × $6.50) Profit = $6,525.00

Pecking Order Theory

firms prefer to use internal financing first whenever possible, then issue debt, then issue equity

Green Shoe Provision

gives the members of the underwriting group the option to purchase additional shares from the issuer at the offering price

Growth equity

has become more common as a form of venture capital in the later stage of a company's growth

seed, or angel, round

initial investment

initial public offering (IPO)

is a company's first equity issue made available to the public; also called an unseasoned new issue

Seasoned equity offering

is a new equity issue of securities by a company that has previously issued securities to the public

rights offer

is a public issue of securities in which securities are first offered to existing shareholders

general cash offer

is an issue of securities offered for sale to the general public on a cash basis

Venture Capital

is financing for new, often high-risk, ventures

Private equity

is often used to label the rapidly growing area of equity financing for nonpublic companies

Crowdfunding

is the practice of raising small amounts of capital from a large number of people, typically via the internet

The ex-dividend date is _____ business day(s) prior to the date of record. one ten two five three

one

share rights plans

provisions allowing existing stockholders to purchase stock at some fixed price should an outside takeover bid come up, discouraging hostile takeover attempts

Clientele Effect

stocks attract particular groups based on dividend yield and the resulting tax effects

Ojomo Corporation recently acquired Fin, Incorporated. Ojomo determined that the transaction had a net present value of $2.2 million. This $2.2 million is called: synergy. the consolidating value. the diversification benefit. the consolidation effect. the agency effect.

synergy.

Spin-Off

the distribution of shares in a subsidiary to existing parent company stockholders

Dilution

the loss in existing shareholders' value in terms of ownership, market value, book value, or EPS

Seasoned equity offering

the sale of additional stock by a company whose shares are already publicly traded

Divestiture

the sale of assets, operations, divisions, and/or segments of a business to a third party

Equity carve-out

the sale of stock in a wholly owned subsidiary via an IPO

split up

the splitting up of a company into two or more companies

firm commitment underwriting

the type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares

Best Efforts Underwriting

the type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

Best efforts offer

the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

Underpricing

the underwriter sells the shares to the public for more than they paid for the shares to the company

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. two four one five three

two