finance exam 3
A preemptive right gives stockholders the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.
False A preemptive right is used to maintain shareholder positions if new shares are issued.
An investor using the DCF stock valuation model would assign a value based on the length of time he or she plans to hold the stock.
False The investor needs to consider the value during the holding period as well as the price at which the share will be sold to someone else.
To find the total return on a share of stock, find the dividend yield and subtract any commissions paid when the stock is purchased and sold.
False total return is dividend yield plus capital appreciation.
Classified stock is the differentiation of different shares of common stock. It gives companies a way to meet special needs such as when owners of a start-up firm need additional equity capital but do not want to relinquish voting control.
True
The type of classified stock where the shares are owned by the firm's founders is called founder's shares. With founders' shares, shareholders generally have more votes per share than with other classes of common stock.
True
Because interest is tax deductible, the relevant cost of new debt used to calculate a firm's WACC is the ______ cost of debt, rd(1 - T).
after-tax
The after-tax cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on ______ cash flows
after-tax
Assume that a company's dividends are expected to grow at a rate of 25% per year for 5 years and then to slow down and to grow at a constant rate of 5% thereafter. The required (and expected) total return, rs, is expected to remain constant at 12%. Which of the following statements is correct? a. The dividend yield will be higher in the early years and then will decline as the annual capital gains yield gets larger and larger, other things held constant. b. Right now, it would be easier (require
b. Right now, it would be easier (require fewer calculations) to find the dividend yield expected in Year 7 than the dividend yield expected in Year 3.
The preemptive right is important to shareholders because it _____.
e. protects the current shareholders against a dilution of their ownership interests
A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on ______ debt
new
The rate at which the firm has borrowed in the past is irrelevant because we need to know the cost of ______ capital
new
It is important to emphasize that the cost of debt is the interest rate on ______ debt, not ______ debt because our primary concern with the cost of capital is its use in capital budgeting decisions.
new outstanding
In order to prevent dilution of control or dilution of value, shareholders use preemptive rights to purchase, on a pro rata basis, any new shares issued by the firm.
true
The marginal investor determines the price at which a new issue of stock will trade when it is brought to market.
true
To find the firm's total corporate value, discount projected free cash flows at the firm's weighted average cost of capital.
true. The free cash flows captures the total firm's value and are thus to be discounted at the Weighted average cost of capital which includes stakeholders like equity holders, bond holders, preferred stock holders etc
The ______ on the company's long-term debt is generally used to calculate the cost of debt because, more often than not, the capital is being raised to fund long-term projects.
yield to maturity
For these reasons, the ______ on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the ______
yield to maturity cupon rate
