FIN3403 Quiz Ch13-15 Prep
Select all that apply Which of the following is true about stock dividends and stock splits?
- Both will reduce the share price. - Both will increase the total number of shares.
Select all that apply Which of the following industries tend to have a high leverage?
- Cable television - Airlines
Select all that apply Which of the following industries tend to have a low leverage?
- Computers - Drugs
Question Mode Multiple Select Question Select all that apply Accounting for the time value of money, which of the following is true of an increase in dividend payout at a point in time?
- It is exactly offset by a decrease somewhere else. - The net effect is zero.
Select all that apply Which of the following are important considerations when choosing between venture capitalists? Select all that apply.
- Style - Financial strength - Exit strategy
Select all that apply Which of the following are generally true about the cost of equity and the cost of debt?
- The cost of debt increases with leverage. - The cost of equity may increase with leverage. - The cost of debt is generally lower than the cost of equity.
Select all that apply Which of the following will apply when a firm's debt levels are extremely high?
- The possibility of financial distress will become a chronic problem. - The benefits of debt financing may be more than offset by the costs of financial distress.
Select all that apply Private placements of debt have the following advantages.
- distribution costs are lower - avoids SEC registration - easier to renegotiate in case of financial distress of the issuer
Select all that apply Which two of the following are broad types of costs of financial distress?
- indirect costs - direct costs
Select all that apply A firm can use a shelf registration if ______.
- it hasn't defaulted on debt in the past three years - it is rated investment grade - the firm's aggregate market value is more than $150 million
Select all that apply Financial distress can arise in the form of possible ______.
- legal bankruptcy - business failure
Select all that apply Which of the following are forms of cash dividends?
- liquidating dividends - special dividends - extra dividends - regular cash dividends
Select all that apply The tax shield afforded by debt will be of the least use to firms with ______.
- losses carried forward - negative EBT
Select all that apply What are some examples of indirect financial distress costs?
- lost reputation - lost sales
Select all that apply Bankruptcy is very valuable because ______.
- payments to creditors cease pending the outcome of the bankruptcy process - it can be used strategically to improve a firm's competitive position
Select all that apply In return for early-stage financing, venture capitalists will frequently receive which of the following?
- seats on the board - convertible preferred stock - ability to name some management
Select all that apply The available evidence indicates that there are pronounced cycles in which of the following?
- the degree of IPO underpricing - the number of IPOs
Select all that apply Possible explanations for the drop in a stock's price after an announcement of a new equity issue are that the announcement is an indication that ______.
- the firm has too much debt - management believes the firm is overvalued
Select all that apply A company may consider a reverse stock split for which of the following reasons?
- to increase liquidity - to reduce transaction costs to investors - to meet exchange listing requirements - to increase the share price to a "respectable" level
Select all that apply Which of the following are costs of issuing new securities?
- underpricing - the spread - the Green Shoe option
Select all that apply Flotation costs for issuing securities include which of the following?
- underwriter's spread - management time - legal fees and taxes - underpricing
In 2010, 80% of the aggregate dividends from U.S. companies were paid by ______.
100 large firms
Based on M&M Proposition I with corporate taxes, the optimal capital structure is ______.
100% debt
The standard length of a lock-up period is ____________ .
180 days
Which costs of financial distress are easier to measure?
Direct costs are easy to measure.
True or false: How a firm raises capital has little to do with its growth prospects.
False
True or false: A new issue option is used to allow underwriters to purchase additional shares at the offer price in order to sell them to investors in an oversubscribed issue.
False A Green Shoe option is used to allow underwriters to purchase additional shares at the offer price in order to sell them to investors in an oversubscribed issue.
True or false: Tombstone is a term used to identify firms that are about to go bankrupt.
False A tombstone is an advertisement announcing a public offering.
True or false: The legal process of bankruptcy is typically quick and inexpensive.
False Bankruptcy is often a lengthy and expensive process.
True or false: Dividends are irrelevant.
False Dividends are relevant. However, dividend policy is irrelevant (in a world without frictions such as taxes or flotation costs) because firm value is unaffected.
True or false: The "partial adjustment" phenomenon refers to the fact that dividends only adjust partially on the day after earnings announcements.
False It refers to the fact that when firms raise their IPO offer prices, they only do so partially, meaning that they don't move the price high enough.
True or false: There is a precise mathematical equation for determining the optimal level of debt for any firm.
False The optimal debt level is determined in a subjective manner. There is no precise equation.
True or false: The period after a new issue is initially sold to the public is referred to as the post-initiation.
False The period after a new issue is initially sold to the public is referred to as the aftermarket.
True or false: Under current law, a repurchase has not advantage over a cash dividend.
False Under current law, a repurchase has a significant tax advantage over a cash dividend.
True or false: In an IPO, when average investors get their full allocation of new shares, it may be because those who knew better avoided the issue. This is known as the purchasing dilemma.
False winner's curse
Which of the following assumptions is necessary for M&M Proposition I to hold?
Individuals can borrow on their own at an interest rate equal to that of the firm.
_____ equity is a label for the rapidly growing area of equity financing for nonpublic companies.
Private
The present value of the interest tax shield equals what?
TC × D
Which act sets forth the federal regulation for all new interstate securities issues?
The Securities Act of 1933
What is the likely impact on a stock's price when dividends are paid?
The price will fall.
Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings (EBIT)?
The rate of return on assets is unaffected by leverage.
True or false: A firm will often split the stock to keep the stock price within a proper trading range.
True
True or false: According to the absolute priority rule, administrative expenses associated with the bankruptcy are paid first in the distribution of the proceeds of liquidation.
True
True or false: An important thing that we know about dividends is that stock prices typically react to unexpected changes in dividends.
True
True or false: Firm value is maximized when the WACC is minimized.
True
True or false: It is possible for the present value of distress costs to exceed the present value of tax savings.
True
True or false: M&M demonstrated that debt financing is neither better nor worse than equity financing.
True
True or false: One disadvantage of dividends is that they are taxed to recipients.
True
True or false: Underpricing led companies to miss out on roughly $63 billion from 1999-2000.
True
True or false: Dividend policy is irrelevant.
True Dividend policy merely establishes the trade-off between dividends at one date and dividends at another date.
_____ occurs to reward institutional investors who helped underwriters price the issue.
Underpricing
______ helps new shareholders earn a higher return on the shares they buy.
Underpricing
What is the expression for the value of a levered firm in the presence of corporate taxes?
Value of levered firm = Value of unlevered firm + Tax benefit of debt
The issuing firm is more certain of raising the needed capital with ______.
a firm commitment offering
In the United States, dividends have historically been taxed at ______ rate compared with capital gains.
a higher
The fact that failure to meet debt obligations can result in bankruptcy is ______.
bad for the firm
If there are no taxes or flotation costs, then investors will ______.
be indifferent between dividends and a repurchase
In the ______ method of issuing securities, the underwriting syndicate avoids the risk of unsold securities.
best efforts
Under the ______ method, the underwriter sells as many shares as possible but may or may not sell all of the new shares.
best efforts
The equity risk that comes from the nature of a firm's operating activities is known as ______.
business risk
The difference between general cash offers and rights offers is that ______.
cash offers are offered to the general public and rights offers are offered first to existing shareholders
A firm's ability to pay dividends may be restricted by:
covenants in a bond indenture.
The date on which the company's Board of Directors passes a resolution to pay a dividend is called the ______ date.
declaration
When a payment is made from a firm's earnings to its owners in the form of cash, it is called a _____.
dividend
According to M&M Proposition I, a firm's capital structure choices ______.
do not affect the value of the firm
The weighted average cost of capital rises at higher levels of debt owing to _____.
financial distress costs
An investor who buys the common stock of a levered firm is subject to more risk due to the addition of ______.
financial risk
The equity risk that comes from the financial policy or capital structure decisions of the firm is known as ______.
financial risk
According to the survey discussed in the text, which of the following is of very little importance to managers in setting dividend policy?
flotation costs to issue new equity
According to a study by Lee, Lockhead, Ritter and Zhao, direct expenses across all offerings are ______ for equity offers than for debt offers.
greater
The value of a levered firm will be _____ than the value of an identical unlevered firm because the levered firm's taxes will be _____.
greater; lower
Equity carries risk; thus, an investor should expect a _____ return than that on less risky debt.
higher
With ______, an investor is able to replicate a corporation's capital structure by borrowing funds and using those funds along with their own money to buy the company's stock.
homemade leverage
A stock split is a(n) in a firm's shares outstanding without any change in owners' equity.
increase
If the degree of leverage increases, the cost of debt will ______.
increase
A stock dividend is not a true dividend because ______.
it is not paid in cash
What is generally the most important component of direct bankruptcy costs?
legal costs
Flotation costs may _____ the payout for firms.
lower
Private equity financing after ground floor financing is termed ______ financing.
mezzanine
The predominant method of selecting an underwriter in the United States is ______.
negotiated offer
With a share repurchase, earnings per share will increase, and total earnings will ______.
not change
When is a new issue usually priced?
on the last day of the registration period
In the world of startup ventures, OPM stands for ______.
other people's money
The SEC's logic for requiring the "quiet period" is that all relevant information should already be publicly available in the ______.
prospectus
The preliminary prospectus, which contains much of the information found in the registration statement and is distributed to potential investors, is called a(n) ______.
red herring
A document required by the SEC for new public issues that contains the issuing firm's financial information, financial history, and details of the existing business is known as the ______.
registration statement
Relatively young firms should consider a dividend policy aimed at ______ .
retaining earnings to reinvest in the firm
Volatility or ______ increases for equity holders when leverage increases.
risk
A new equity issue by a publicly traded firm is known as a(n) ______.
seasoned equity offering
The idea that a firm borrows to the point that the tax benefit of debt is exactly equal to the increased probability of financial distress is called the ______ theory of capital structure.
static
An alternative way to pay out a firm's earnings to shareholders instead of cash dividends is a ______.
stock repurchase
A(n) ______ repurchase occurs when a firm repurchases shares from specific individual stockholders.
targeted
A university endowment fund might prefer high-dividend-paying stocks since it is usually ______.
tax-exempt
Which of the following investors might prefer a high dividend payout?
tax-exempt investors
The concept that stocks attract certain investors due to a firm's dividend policy and the resulting tax impact is called ______.
the clientele effect
Which of the following is considered to be the main factor influencing a firm's dividend decision?
the consistency of its dividend policy
A beneficial rule to follow is to set the firm's capital structure so that ______.
the firm's value is maximized
The difference between the price the issuer receives and the offering price is ______.
the gross spread
Under M&M Proposition II, a firm's WACC remains unchanged regardless of changes in its capital structure because as the % of debt increases ______.
the increase in the cost of both debt and equity is exactly offset by the increase in the % of lower cost debt
The tax savings attained by a firm from the tax deductibility of interest expense is called ______.
the interest tax shield
The unwillingness of many older, giant firms to cut dividends is referred to as ______.
the legacy effect
The basic question of dividend policy is the choice of ______.
the time pattern of dividend payout
Dividend policy can best be described as the:
time pattern of dividend payout.
If a cash offer is a public offer, a(n) ______ is usually involved.
underwriter
A Dutch auction underwriting is also known as a(n) ______.
uniform price auction
An initial public offering (IPO) is also referred to as a(n) ______.
unseasoned new issue
A dividend ______ is calculated as a percentage of the stock's market price.
yield
A firm is considered bankrupt when the value of its equity is ______.
zero