FINA 6340-01: Exam 2 (Ch 16 & 17)

Dividend Reinvestment Plans have the option of:

Automatically reinvesting some or all of their cash dividends in shares of stocks

According to pecking-order theory:

Companies stockpile internally generated cash.

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

Date of record

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?

Distributions

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

Ex-dividend date

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

Homemade dividend

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

M&M proposition I, no tax

Which one of the following is a direct cost of bankruptcy?

Paying an outside accountant to prepare bankruptcy reports

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

Stock Dividend

Trinh Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?

Stock repurchase

Which of the following favors a low dividend policy?

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

The stock of Solid Ware has recently sold for as little as $14.25 per share and as much as $22.50 per share. The difference between these two share prices is called the:

Trading range

M&M Proposition I with no tax supports the argument that:

a company's debt-equity ratio is completely irrelevant

The symbol Ru refers to the cost of capital for ____ while Ra is ____

all-equity company; weighted average cost of capital

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:

be more desirable than a cash dividend in respect to taxes

Homemade leverage is employed when:

investor uses debt to change his/her exposure to financial leverage

The business risk of a company:

is positively related to the company's cost of equity.

A company is technically insolvent when:

it is unable to meet its financial obligations.

A firm should select the capital structure that:

maximizes the value of the firm.

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 stock split is characterized by all of the following, except:

paid in cash to outstanding shareholders

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

sell 42% of her shares of Hwajin stock and lend out the sale proceeds

10. Share repurchases are typically accomplished in one of three ways: Open market buy back, Tender offer, and ____

targeted repurchase

The interest tax shield is a key reason why:

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

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

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

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 cost.

the static theory of capital structure

In general, the capital structures of U.S. firms:

vary significantly across industries.

M&M Proposition I with tax implies that the:

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

The absolute priority rule determines:

which parties receive payment first in a bankruptcy proceeding.

The optimal capital structure:

will vary over time as taxes and market conditions change.