Financial Management Final Multiple Choice

Priority list of liquidation

1. Administrative expense associated with the bankruptcy 2. Other expenses arising after the filing of an involuntary bankruptcy petition but before the appointment of a trustee 3. Wages, salaries, and commissions 4. Contributions to employee benefit plans 5. Consumer claims 6. Government tax claims 7. Payment to unsecured creditors 8. Payment to preferred stockholders 9. Payment to common stockholders

In a perfect bankruptcy, a firm becomes bankrupt when all of the following occur, except: Assets equal the value of the debt. The value of the equity is zero. Stockholders turn over control to the bondholders. Bondholders hold assets valued the same as debt owed. Assets equal the value of the equity.

Assets equal the value of the equity.

Which one of these statements related to Chapter 11 bankruptcy is correct? Multiple Choice Prepacks apply only to Chapter 7, not Chapter 11, bankruptcies. Senior management must be replaced prior to exiting a Chapter 11 bankruptcy. A company can only file for Chapter 11 after it becomes totally insolvent. Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage. Chapter 11 involves the total liquidation of the bankrupt firm.

Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage.

direct versus indirect costs of bankruptcy.

Direct Bankruptcy Cost are cost that are directly associated with bankruptcy, such as legal and administrative expenses. Indirect Bankruptcy Costs are costs of avoiding a bankruptcy filing incurred by a finacially distressed firm.

accounting insolvency

Firms with negative net worth are insolvent on the books. This happens when the total book liabilities exceed the book value of the total assets

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? Loan obtained to finance the project Initial investment in inventory to support the project Annual depreciation tax shield Aftertax salvage value Net working capital recovery

Initial investment in inventory to support the project

Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow? Internal growth rate (1 − .30) Sustainable growth rate (1 − .30) Internal growth rate Sustainable growth rate Zero percent

Internal growth rate

Which one of the following is a direct cost of bankruptcy? Bypassing a positive NPV project to avoid additional debt Investing in cash reserves Maintaining a debt-equity ratio that is lower than the optimal ratio Losing a key company employee Paying an outside accountant to prepare bankruptcy reports

Paying an outside accountant to prepare bankruptcy reports

Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding? Consumer claims Dividend payment to preferred shareholders Company contribution to the employees' retirement account Payment to an unsecured creditor Payment of employees' wages

Payment of employees' wages

Indirect bankruptcy costs include all of the following, except: The costs of departing employees. The shareholders taking over management of the firm. High value projects are put on hold. Profitable investments are postponed. Management is distracted from operating the business.

The shareholders taking over management of the firm.

Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year? The pro forma profit margin is equal to the current profit margin. Retained earnings will increase at the same rate as sales. Total assets will increase at the same rate as sales. Long-term debt will increase in direct relation to sales. Owners' equity will remain constant.

Total assets will increase at the same rate as sales.

Which one of the following statements concerning venture capital financing is correct? Venture capitalists desire shares of common stock but avoid preferred stock. Venture capital is relatively easy to obtain. Venture capitalists rarely assume active roles in the management of the financed firm. Venture capitalists should have key contacts and financial strength. Venture capital is relatively inexpensive in today's competitive markets.

Venture capitalists should have key contacts and financial strength.

Bankruptcy

a legal proceeding for liquidating or reorganizing a business

Pro forma statements: must assume that no new equity is issued. are projections, not guarantees. are limited to a balance sheet and income statement. must assume that no dividends will be paid. exclude net working capital needs.

are projections, not guarantees.

business failure

business has terminated with a loss to creditors; but even an all-equity firm can fail

A firm's external financing need is met by: retained earnings. net working capital and retained earnings. net income and retained earnings. debt or equity. owners' equity, including retained earnings.

debt or equity. EFN formula subtracts debt and equity

Reorganization

financial restructuring of a failing firm to attempt to continue operations as a going concern

legal bankruptcy

firms or creditors bring petitions to a federal court for bankruptcy

Wood Products is operating at 87 percent capacity and earning a substantial profit. A sales increase is least apt to increase the firm's: accounts receivable. cost of goods sold. accounts payable. fixed assets. inventory. fixed assets.

fixed assets.

A company's weighted average cost of capital: is equivalent to the aftertax cost of the outstanding liabilities. should be used as the required return when analyzing any new project. is the return investors require on the total assets of the firm. remains constant when the debt-equity ratio changes. is unaffected by changes in corporate tax rates.

is the return investors require on the total assets of the firm.

A company is technically insolvent when: it has a negative book value. its total debt exceeds its total equity. it is unable to meet its financial obligations. it files for bankruptcy protection. the market value of its stock is less than its book value.

it is unable to meet its financial obligations.

A firm should select the capital structure that: produces the highest cost of capital. maximizes the value of the firm. minimizes taxes. is fully unlevered. equates the value of debt with the value of equity.

maximizes the value of the firm.

liquidation

means the termination of the firm as a going concern, and it involves selling of the assets of the firm

technical insolvency

occurs when a firm is unable to meet its financial obligations

Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business. The process this company underwent is known as a: merger. repurchase program. liquidation. reorganization. divestiture.

reorganization.

The Securities and Exchange Commission: verifies the accuracy of the information contained in the prospectus. publishes red herrings on prospective new security offerings. examines the prospectus during the Green Shoe period. reviews registration statements to ensure they comply with current laws and regulations. determines the final offer price once they have approved the registration statement.

reviews registration statements to ensure they comply with current laws and regulations.

Capital Structure

the mix of equity and debt financing a firm uses to meet its permanent financing needs

In general, the capital structures of U.S. firms: tend to overweigh debt in relation to equity. generally result in debt-equity ratios between .45 and .55. are fairly standard for all SIC codes. tend to exceed a debt-equity ratio of .45. vary significantly across industries.

vary significantly across industries.

The value of a firm is maximized when the: cost of equity is maximized. tax rate equals the cost of capital. levered cost of capital is maximized. weighted average cost of capital is minimized. debt-equity ratio is minimized.

weighted average cost of capital is minimized.

Straight liquidation includes all of the following, except: A petition is filed in court. Trustee-in-bankruptcy is elected. Borrowing funds to keep the business operating. Payments are made for bankruptcy administrative costs. Creditors are paid.

Borrowing funds to keep the business operating.

Types of underwriting

Firm Commitment - the issuer sells the entire issue to the underwriters -all the risk associated is with the underwriter Best Efforts -the underwriter is legally bound to use best efforts to sell the securities at the agreed-upon offering price -the company bears the risk Dutch Auction -the underwriter conducts and auction in which investors bid for shares -the risk is on the public

Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this? Best efforts Shelf Oversubscribed Private placement Firm commitment

Firm commitment

Trevor is the CEO of Harvest Foods, which is a privately held corporation. What is the first step he must take if he wishes to take Harvest Foods public? Select an underwriter Obtain SEC approval Gain board approval Prepare a registration statement Distribute a prospectus

Gain board approval

When developing a financial plan for a corporation you should consider which of the following? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

I,II,III,IV

Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements? Need for additional fixed assets Current fixed costs Projected sales Desired net income Desired dividend payments

Projected sales

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? Best efforts offer Firm commitment offer General cash offer Rights offer Priority offer

Rights offer

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this? Standby registration Shelf registration Regulation A registration Regulation Q registration Private placement registration

Shelf registration

Explain the difference between technical and accounting insolvency.

Technical insolvency occurs when a firm is unable to meet its financial obligations. Accounting insolvency occurs when firms with negative net worth are insolvent on the books. This happens when the total book liabilities exceed the book value of the total assets.

Which one of the following statements related to Chapter 7 bankruptcy is correct? A company in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern. Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated. Chapter 7 bankruptcies are always involuntary on the part of the firm. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock can be issued.

Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated.

Pro forma financial statements can best be described as financial statements: expressed in a foreign currency. where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. showing projected values for future time periods. expressed in real dollars, given a stated base year. where all accounts are expressed as a percentage of last year's values.

showing projected values for future time periods.