Financial Management Final
Which of the following are consequences of nonpayment of debt obligations?
-a firm may be forced to file for bankruptcy -the firm will encounter some form of financial distress
How do bankruptcy costs affect bondholders and shareholders in the context of the distribution of firm value
-both bondholders and shareholders are adversely affected
Financial distress can arise in the form of possible
-business failure -legal bankruptcy
a corporation gains no value from an interest tax shield
-corporation has no debt -corporate tax rates are zero -corporation is an all-equity firm
which of the following are sensible payout policies
-set a consistent dividend policy -avoid cutting positive NPV projects to pay dividends -over time, pay out all free cash flows
Which of the following are reasons why investors might favour a high-dividend payout?
-stock sales are time consuming -the transactions costs for selling low dividend paying stocks can -investors have a preference for current
In a world without bankruptcy costs or taxes, the value of the firm (the pie) is divided among which of the following?
-stockholders -bondholders
In the absence of taxes, the value of a firm is the same with debt financing as it is with equity financing because
-the asset to be finances is the same -MM demonstrated that debt financing is neither better nor worse than
Which of the following will apply when a firm's debt levels are extremely high?
-the benefits of debt financing may be more than offset by the costs of financial distress -the possibility of financial distress will become a chronic problem
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 debt is generally lower than the cost of equity -the cost of equity may increase with leverage
Which of the following are reasons for reverse stock splits?
-to eliminate small shareholders -to comply with listing requirements -to raise stock prices to respectable levesl
Place the steps needed to calculate the values of a levered firm with perpetual cash flows in order starting with the first step
1. Calculate ebit 2. multiply EBIT by 1 minus the corporate tax rate 3. divide by the cost of equity for an all-equity firm 4. Add the present value of the debt tax shield
What is the preferred source of financing for firms according to the pecking order theory?
1. Retained earnings 2. debt 3. common stock
In 2000, 80% of the aggregate dividends from US companies were paid by
100 large firms
MM's assertion of a positive relationship between firm value and leverage is widely observed in the business world
FALSE
True or false: dividends are irrelevant
FALSE
true or false: there is a precise mathematical equation for determining debt for any firm
FALSE
T or F Nonpayment of periodic interest on debt can lead to bankruptcy
TRUE
According to the clientele effect, can a firm boost its share price by raising dividends?
Yes, but only if an unsatisfied clientele exist
If a firm has multiple projects, each project should be discounted using
a discount rate commensurate with the project's risk
Stockholders and bondholders
are not the only claimants to the cash flows of the firm
When is the present value of distress costs likely to exceed the present value of the tax shield
at high levels of debt
Homemade dividends allow a stockholder to change the ________-
cash payout received by selling shares to receive current cash or purchasinng addition
the cost of debt will begin to increase as the
degree of leverage increases
Which two of the following are broad types of costs of financial distress?
direct and indirect costs
An unlevered firm_____________
has an all-equity capital structure
to a tax-paying stockholder, a stock repurchase generally
has significant tax advanagts compared to a cash dividend
A one-for-five reverse stock split will
increase a $1 par value to $5
In a perfect market stockholders are ________ between a stock _______and a _______
indifferent; repurchase; dividend
according to critics of modigliani and miller the capital structure
irrelevant
with a 2-for-1 stock split, the number of shares are doubled and the par value
is cut in half
The manager of a firm should change the capital structure if and only if
it increases the value of the firm
Which of the following are nonmarketed claims to the firms cash flows?
legal fees taxes
According to a recent survey, the highest priority for financial managers is to
maintain a consistent dividend policy
the information content of a dividend decrease may be that
management believes future earnings will decline
Based on the static theory, what should the managers
maximize the tax shield benefit of debt and minimize financial distress
The value of the firm is maximized when the weighted average cost of capital is
minimized
If a firm issues new equity, investors will infer that the firm's outstanding stocks must be
overvalued
The point at which the tax saving from an additional dollar in debt financing is exactly
static theory of capital structure
MM II Proposition Shows That:
the cost of equity rises with leverage
what is the likely impact on a stock's price when dividends are paid
the price will fall
Which theory of capital structure leads to a target debt ratio
the static trade-off theory of capital structure
What are some ways in which a bankruptcy filing might hinder a firm's normal business operations?
-customers may not buy, fearing future service problems -suppliers may not supply inventory, fearing nonpayment -banks may place restrictions on the firm's financial activities
The WACC is the cost of _________ times its weight in the capital structure plus the cost of _______ times its weight in the capital structure
-debt; equity
A firm can pay out its cash earnings to its shareholders in which of the following ways
-dividends -share repurchase
Dividends received by shareholders are expressed in which of the following
-dividends per share -dividend payout -dividend yield
According to graham, dodd, and cottle, firms should generally have
-everything else being equal, firms that pay higher dividends usually sell at a higher perice -the discounte dvalue of near dividends is greater than the discour
What are some examples of indirect financial distress costs?
-lost sales -lost reputation
Which of the following usually occur with a stock dividend?
-no cash laves the firm -the price per share falls -the number of shares increase
A firm's cost of debt can be
-obtained by checking yields on publicly traded bonds -obtained by talking to investment bankers -estimated easier than its cost of equity
The _________ theory is the dominant theory of capital structure
trade-off
True or false: it is possible for the present value of distress costs to exceed the present value of tax savings
true
Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings?
-the rate of return on assets in unaffected by leverage -below the indiferrence or break-even point in ebit -financial leverage increases the slope of the eps line
