FINA 3313 Ch. 14, 15, 16

The benefit of an interest tax shield is captured by the equity holders.

TRUE

Debt may be the preferred form of external financing for many firms because:

equity issuance is considered by investors to be a negative sign.

Those who benefit from the interest tax shield are:

equityholders.

Which one of the following statements is correct concerning stock dividends?

Common stock dividends cannot be paid if preferred stock dividends are in arrears.

A capital surplus is obtained when the selling price of new shares is greater than the par value

TRUE

Differences in classes of stock often appear in their voting rights

TRUE

The "trade-off theory" of capital structure suggests that firms have an optimal level of debt

TRUE

The SEC requires the sale of a private placement to be limited to a small number of knowledgeable investors.

TRUE

The gap between internally generated cash and the cash that the company needs is called the financial deficit.

TRUE

The pecking-order theory of capital structure depicts the fact that firms prefer internal financing to avoid sending out adverse signals that may lower the stock price

TRUE

The price at which new shares are sold to investors almost always exceeds par value. The difference is entered into the company's accounts as additional paid-in capital, or capital surplus.

TRUE

Underwriters usually play a triple role—first providing the company with procedural and financial advice, then buying the stock, and finally reselling it to the public.

TRUE

When a public company makes a general cash offer of debt or equity, it essentially follows the same procedure used when it first went public.

TRUE

When asked about key factors of debt policy, financial managers commonly mention the tax advantage of debt and the importance of maintaining their credit rating

TRUE

When firms retain cash, they are generating funds internally thereby decreasing the amount of external funds needed

TRUE

When securities are issued under a firm commitment, the underwriter bears the risk of low sales.

TRUE

When there are no taxes and capital markets function well, the market value of a company does not depend on its capital structure.

TRUE

The trade-off theory of capital structure describes the optimal capital structure for any firm as being the level of debt that:

maximizes the present value of the interest tax shield

A proxy contest is typically one in which:

outsiders attempt to gain control from management

A stock's par value is represented by the:

price at which each share is recorded

Bonds that have been sold only to a limited number of institutional investors are considered

private placements.

Financial risk refers to the

risk faced by equityholders of firms with debt

When underwriters issue securities on a best efforts basis, they

sell as much of the stock as possible, but with no guarantee

A secondary offering IPO occurs when:

the company's founders or venture capitalists market a portion of their shares

According to MM II, as a firm's debt-equity ratio decreases:

the required rate of return on equity decreases.

The most likely reason that under pricing of new issues occurs more frequently than overpricing is that:

underwriters want to reduce the risk of a firm commitment.

Issue costs for debt are considerably lower than issue costs for equity securities.

TRUE

A corporation with funded fixed-rate debt might prefer floating-rate debt if it thought that

interest rates would be declining.

MM's proposition I states that the required rate of return on equity increases as the firm's debtequity ratio increases.

FALSE

Which one of these terms applies to a public company offering new shares to the general public?

General cash offer

When corporate taxes are considered, how does leverage affect the WACC?

Increased leverage will decrease the WACC.

Which one of the following lists presents the order of financing from most preferred to least preferred according to the pecking-order theory?

Internally generated funds, debt issue, stock issue

Which one of the following statements about floating-rate preferred stock is correct?

Its dividends increase as interest rates increase.

Shares of stock that have been issued and subsequently repurchased by the issuer are known as treasury stock.

TRUE

Suppose a firm needs fresh capital, but its management does not want to give up its controlling interest. The existing shares could be labeled Class A, and then Class B shares with limited voting rights could be issued to outside investors.

TRUE

Which one of the following equity concepts would you expect to be least important to a financial analyst?

Par value per share

A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.

TRUE

Costs of financial distress are costs arising from bankruptcy or distorted business decisions before bankruptcy.

TRUE

Debt finance does not affect the operating risk but it does add financial risk

TRUE

Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds.

TRUE

Financial leverage describes debt financing's amplification of the effects of changes in operating income on the returns to stockholders

TRUE

If shareholders do not like the policies that management pursues, their easiest solution is to vote in a different board of directors

TRUE

In a rights offering, the shares are priced at a substantial discount to current market value, which ensures that the shareholders will either exercise the rights themselves or sell them to other investors.

TRUE

Once you recognize the fact that debt also increases financial risk and causes shareholders to demand a higher return on their investment, debt is no cheaper than equity

TRUE

A major purpose of the prospectus is to

advise investors of the security's potential risks.

In return for providing funds, venture capitalists generally require:

an equity position in the firm.

The most important function of an underwriter is to:

buy the securities issue from the firm and resell the securities to the public

When new shares of stock are sold at a price greater than par value, the excess over par is recorded as:

capital surplus.

According to pecking-order theory, managers will often choose to finance with:

debt rather than new equity, to avoid reduced share price.

Issue costs for equity are higher than those for debt for all of the following reasons except:

equity issues have no economies of scale.

When securities are issued under a rights issue:

existing shareholders have the opportunity to expand their holdings

MM's proposition II without taxes states that the

expected return on equity increases as financial leverage increases.

Funded debt refers to those liabilities that

have a maturity of more than one year remaining

Preferred stock dividends:

have priority over common stock dividends

An increase in a firm's financial leverage will

increase the variability in earnings per share.

Leverage will _____ shareholders' expected return and ______ their risk.

increase; increase