Key_Fin303
Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.M&M Proposition 1: How much is Dynamo worth today? A) $1,765 B) $1,500 C) $2,143 D) None of the above.
B) $1,500
Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the underpricing spread? A) $51 million B) $15 million C) $66 million D) None of the above.
B) $15 million
IPO pricing: Pau, Inc., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the total cost of issuing the securities to the firm? A) $13.6 million B) $20.83 million C) $20.6 million D) None of the above
B) $20.83 million
The benefits of debt: A firm plans to issue $1 million worth of debt at a YTM of 9%. The debt is trading at par. The firm's marginal corporate tax rate is 25%, while its average tax rate is 15%. By how much will this debt issuance reduce the firm's annual tax liability? A) $13,500 B) $22,500 C) $32,500 D) None of the above.
B) $22,500
55. M&M Proposition 1: How much does Dynamo currently pay in interest, and how much will it have to pay after the restructuring in the prior problem, assuming that the cost of debt is constant? A) $42 and $26.25 B) $26.25 and $42 C) $160 and $37.50 D) $37.50 and $60
B) $26.25 and $42
IPO: Fortune Hotels issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 20 percent. Five million shares are issued. However, the bank was overly optimistic and could not sell at the offer price of $31. If the net proceeds to the issuer is $110 million, how much did the investment bank receive? A) $22.0 million B) $27.5 million C) $31.0 million D) None of the above
B) $27.5 million
Millennium Motors has current pretax annual cash flows of $1,000 and is in the 35% tax bracket. The appropriate discount rate for its cash flows is 12%. Suppose the firm issues a $1,500 bond and uses these proceeds to pay a one-time special dividend to shareholders The cost of equity: What is Millennium's value after the debt issuance? A) $5,417 B) $5,942 C) $6,392 D) None of the above. Ans: B
B) $5,942
M&M Proposition 2: Suppose a firm has a cost of equity of 12%, a D/E or 1/6, and the YTM on its bonds is 7.5%. The risk-free rate is currently 3%. What is the current required rate of return on its assets and equity if the D/E is changed to 1/3? A) 11.35% and 13.25% B) 11.35% and 8.25% C) 13.25% and 11.35% D) None of the above.
B) 11.35% and 8.25%
M&M Proposition 2: Bellamee, Inc., has a required rate of return on its assets of 12% and a cost of debt of 6.25%. Their current debt-to-equity ratio is 1/5. What is the required rate of return on their equity? A) 12.15% B) 13.15% C) 14.15% D) None of the above
B) 13.15%
Bank lending: Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm B's credit standing is prime + 2. The current prime rate is 5.75 percent, the 30-year Treasury bond yield is 4.35 percent, the three-month Treasury bill yield is 3.54 percent, and the 10-year Treasury note yield is 4.24 percent. What are the appropriate loan rates for each customer? A) 6.45%, 7.75% B) 6.45%, 8.45% C) 5.75%, 8.45% D) None of the above
B) 6.45%, 8.45%
M&M Proposition 2: A firm has a WACC of 8.5%, a pretax cost of debt of 5%, a cost of equity of 12%, and a marginal corporate income tax rate of 35%. What percent of the firm is financed with equity? A) 50% B) 60% C) 70% D) None of the above
B) 60%
M&M Proposition 2: Suppose revenues fall by $300. What is the percent change in net income with and without the debt? Assume that the total variable productions costs remain the same. A) 64.5% and 60% B) 60% and 64.5% C) 59.2% and 40.8% D) 40.8% and 59.2%
B) 60% and 64.5%
Which one of the following statements is NOT true? A) Private placement occurs when a firm sells unregistered securities directly to investors such as insurance companies, commercial banks, or wealthy individuals. B) All corporate debt is sold through the private placement market. C) About half of all corporate debt is sold through the private placement market. D) Investment banks and money center banks often assist firms with private placements.
B) All corporate debt is sold through the private placement market.
Which one of the following statements is NOT true? A) Shelf registration gives firms less flexibility in bringing securities to market. B) During a two-year window, the firm can take the securities "off the shelf" and sell them as needed. C) Shelf registration allows firms to periodically sell small amounts of securities. D) A shelf registration statement can cover multiple securities, and there is no penalty if authorized securities are not issued.
A) Shelf registration gives firms less flexibility in bringing securities to market.
The most likely reason that underpricing of new issues occurs more frequently than overpricing is the: A) Underwriters' desire to reduce the risk of a firm commitment. B) Demand for a new issue is typically too high. C) Underwriters earn low rates of return D) Issuing firms demand that equity be underpriced.
A) Underwriters' desire to reduce the risk of a firm commitment.
According to M&M Proposition 2, the cost of a firm's equity A) increases with the debt-to-equity ratio. B) decreases with the debt-to-equity ratio. C) increases and then falls with the debt-to-equity ratio. D) decreases and then increases with the debt-to-equity ratio.
A) increases with the debt-to-equity ratio.
The asset substitution problem occurs when A) managers substitute riskier assets for less risky ones to the detriment of bondholders. B) managers substitute less risky assets for riskier ones to the detriment of bondholders. C) managers substitute riskier assets for less risky ones to the detriment of equity holders. D) managers substitute less risky assets for riskier ones to the detriment of equity holders.
A) managers substitute riskier assets for less risky ones to the detriment of bondholders.
32. Bootstrapping is the process by which A) many entrepreneurs raise "seed" money and obtain other resources necessary to start their businesses. B) the entrepreneur often fleshes out his or her ideas and makes them operational. C) most businesses are started by an entrepreneur. D) none of the above.
A) many entrepreneurs raise "seed" money and obtain other resources necessary to start their businesses.
Financial risk A) refers to the effect that a firm's financing decisions has on the riskiness to cash flows that investors will receive. B) increases a firm's business risk. C) decreases a firm's business risk. D) is related to how debt affects the business decisions of a firm.
A) refers to the effect that a firm's financing decisions has on the riskiness to cash flows
A firm's enterprise value is given by A) the value of equity plus the value of debt. B) the value of equity minus the value of debt. C) the value of equity minus the value of debt plus the value of future projects. D) none of the above.
A) the value of equity plus the value of debt.
The underinvestment problem occurs in a financially distressed firm when A) the value of investing in a positive-NPV project is likely to go to debt holders instead of equity holders. B) the value of investing in a positive-NPV project is likely to go to equity holders instead of debt holders. C) management invests in negative-NPV projects to reduce their own risk. D) issuing equity becomes difficult due to increased risk.
A) the value of investing in a positive-NPV project is likely to go to debt holders instead of equity holders.
Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stockM&M Proposition 1: How much are your cash flows today? A) $12.38 B) $15 C) $4.50 D) $150
A) $12.38
IPO pricing: Pau, Inc., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the underwriting cost? A) $13.6 million B) $20.6 million C) $6.96 million D) None of the above.
A) $13.6 million
The benefits of debt: Packman Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. If the firm borrows $2,000, its YTM will be 6.5% and its coupon rate will be 8%. If the company's marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings? A) $238 B) $272 C) $259 D) None of the above.
A) $238
IPO: Fortune Hotels issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 20 percent. Five million shares are issued. However, the bank was overly optimistic and could not sell at the offer price of $31. If the net proceeds to the issuer were $110 million, what was the per share price at which the shares were sold? A) $27.50 B) $22 C) $31 D) None of the above
A) $27.50
IPO: Bethesda Biosys issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 18 percent of the offer price, which is set at $25 per share. Four million shares are issued. However, the bank was overly optimistic and eventually is able to sell the stock for only $23 per share. What are the proceeds for the issuer? A) $74 million B) $92 million C) $100 million D) None of the above
A) $74 million
General cash offering: Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $30 million to finance it. The company plans to raise the money through a general cash offering priced at $23.50 a share. Star's underwriters charge a 6 percent spread. How many shares does the company have to sell to achieve its goal? A) 1,358,081 shares B) 1,276,596 shares C) 1,200,000 shares D) None of the above
A) 1,358,081 shares
Academic studies have estimated that the tax benefit of debt realized by firms is approximately A) 10% of firm value. B) a 10% reduction in WACC. C) a 10% reduction in the cost of debt D) 10% of debt value.
A) 10% of firm value.
M&M Proposition 2: Using the information for Bellamee from Question 64, what is its required return on equity if its debt-to-equity ratio changes to 2/5 and this increases the required rate of return on their debt to 7%? A) 14% B) 14.25% C) 14.50% D) 15%
A) 14%
Bank lending: Marigold Corp. wants to borrow money from Howard Bank for a period of five years. The firm's credit standing calls for a premium of 1.5 percent over the prime rate. The current prime rate is 6.5 percent, the 30-year Treasury bond yield is 5.375 percent, the three-month Treasury bill yield is 3.525 percent, and the 5-year Treasury note yield is 4.25 percent. What is the appropriate loan rate for this customer? A) 8.725% B) 7.225% C) 6.500% D) None of the above
A) 8.725%
Which ONE of the following statements is true? A) A typical venture capital fund may generate annual returns of 15 to 25 percent on the money that it invests, compared with an average annual return for the S&P 500 of almost 12 percent. B) A typical venture capital fund may generate annual returns of 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 20 percent. C) A typical venture capital fund may generate annual returns of 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 25 percent. D) None of the above
A) A typical venture capital fund may generate annual returns of 15 to 25 percent on the money that it invests, compared with an average annual return for the S&P 500 of almost 12 percent.
Which one of the following statements is NOT true? A) In a best-efforts offering, the underwriters will suffer a financial loss if the offer price is set too high. B) In a best-efforts agreement, the issuing firm will lose if the offer price is set too high. C) If the underpricing is significant, the investment banking firm will suffer a loss of reputation for failing to price the new issue correctly and raising less money for its client than it could have. D) Underpricing is defined as offering new securities for sale at a price below their true value.
A) In a best-efforts offering, the underwriters will suffer a financial loss if the offer price is set too high.
Disadvantages of going public include all EXCEPT A) Managers' tendency to focus on long-term profits. B) The high cost of the IPO itself. C) The costs of complying with ongoing SEC disclosure requirements. D) The transparency that results from this compliance can be costly for some firms.
A) Managers' tendency to focus on long-term profits.
Which one of the following statements is NOT true? A) PIPE transactions are registered with the SEC. B) PIPE transactions are not registered with the SEC. C) In a PIPE transaction, investors purchase securities (equity or debt) directly from a publicly traded company in a private placement. D) The securities are virtually always sold to the investors at a discount to the price at which they would sell in the public markets.
A) PIPE transactions are registered with the SEC.
Which of the following arises because the lessee can have the incentive to use the asset more than the lessor would prefer? a. Operating lease conflict b. Capital lease conflict c. Intensity of use conflict d. Maintenance conflict
c. Intensity of use conflict
Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the firm's total cost of issuing the securities? A) $24.9 million B) $15.35 million C) $25.25 million D) None of the above
C) $25.25 million
The benefits of debt. A firm plans to issue $1 million worth of debt at a YTM of 9%. The debt is trading at par. The firm's marginal corporate tax rate is 35%. What is the present value of the tax savings in perpetuity? A) $11,025 B) $20,475 C) $350,000 D) $227,500
C) $350,000
Suppose that Banana Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only includes the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and a YTM of 7.9% to its capital structure. M&M Proposition 2: What is the net income of Banana without and with the debt? A) $500 and $484.2 B) $484.2 and $500 C) $500 and $465 D) $490 and $500
C) $500 and $465
IPO pricing: Pau, Inc., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the underpricing cost of issuing the securities to the firm? A) $13.6 million B) $20.6 million C) $6.96 million D) $7.57 million
C) $6.96 million
IPO: Dienz Pharma issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 16 percent of the selling price. The offer price is set at $32 per share. Three million shares are issued. However, the bank was able to see the shares at $26.25 per share. What are the proceeds for the issuer? A) $96.00 million B) $78.75 million C) $66.15 million D) None of the above
C) $66.15 million
M&M Proposition 2: Rubber Chicken Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm's cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC? A) 8.4% B) 9.6% C) 10.4% D) 9.2%
C) 10.4%
Suppose that Banana Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only includes the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and a YTM of 7.9% to its capital structure. M&M Proposition 2: What percent of the firm's costs are fixed, and what percent are variable with the added debt? A) 27.9% and 72.1% B) 72.1% and 27.9% C) 25.23 and 74.77% D) 74.77% and 25.23%
C) 25.23 and 74.77%
The pecking order theory: A firm wishes to undertake a project that costs $150mm. It currently has $10mm in cash on hand and believes that it can raise $75mm in debt and $100mm in equity if needed. According to the pecking order theory of the capital structure, what percent of the project will be financed by debt? A) 0% B) 26.67% C) 50% D) None of the above
C) 50%
Bank lending: Jasper, Inc., is looking for a five-year term loan of $3 million. Its bank is willing to make the loan. The firm will have to pay a premium of 1.5 percent for default risk and another 0.75 percent for maturity risk. The current prime rate is 7.5 percent. What is the loan rate on this bank loan? A) 9% B) 8.25% C) 9.75% D) None of the above
C) 9.75%
Benefits from shelf registration include all EXCEPT: A) Greater flexibility in bringing securities to market. B) Shelf registration allows firms to periodically sell small amounts of securities and raise capital as needed. C) A shelf registration statement can cover multiple securities, but there is a penalty if authorized securities are not issued. D) Costs associated with selling the securities are reduced because only a single registration statement is required.
C) A shelf registration statement can cover multiple securities, but there is a penalty if authorized securities are not issued.
M&M Proposition 1: According to M&M Proposition 1, what transaction do you need to take in order to undo the restructuring? A) Sell $22.50 of stock. B) Sell $10.80 worth of stock. C) Buy $22.50 worth of debt. D) Buy $10.80 worth of debt.
C) Buy $22.50 worth of debt.
Which of the following supports the trade-off theory of capital structure? A) Firms use cash on hand first, since issuing equity and debt is expensive. B) A firm's capital structure is the result of past equity and debt issuance decisions. C) Firms have a target capital structure. D) a and b.
C) Firms have a target capital structure.
Which of these is not an example of indirect bankruptcy costs? A) A firm's customers become concerned about whether or not warranties will be honored. B) Employees begin to leave the firm. C) New accountants are brought in to help with the bankruptcy process. D) A bankruptcy judge orders new projects to be halted.
C) New accountants are brought in to help with the bankruptcy process
45. Which one of the following statements is NOT true? A) Investment bankers provide three basic services when bringing securities to market—origination, underwriting, and distribution. B) During the origination phase, the investment banker helps the firm determine whether it is ready for an IPO. C) Origination is the risk-bearing part of investment banking. D) Origination includes giving the firm financial advice and getting the issue ready to sell.
C) Origination is the risk-bearing part of investment banking
Which one of the following statements is NOT true? A) Private equity firms pool money from wealthy investors, pension funds, insurance companies, and other sources to make investments. B) Private equity firms invest in more mature companies. C) Private equity firms invest in new companies. D) Private equity investors focus on firms that have stable cash flows because they use a lot of debt to finance their acquisitions.
C) Private equity firms invest in new companies
M&M Proposition 1: How much of the special dividend do you receive, and how much do you receive in regular dividends per annum after the restructuring? A) $15 and $60 B) $60 and $15 C) $10.80 and $22.50 D) $22.50 and $10.80
D) $22.50 and $10.80
IPO underpricing: When Geo Corp. went public in September 2008, the offer price was $19.00 per share and the closing price at the end of the first day was $24.70. The firm issued 4 million shares. What was the loss to the company due to underpricing? A) $13.6 million B) $20.83 million C) $20.6 million D) $22.8 million
D) $22.8 million
54. M&M Proposition 1: If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue? A) $321 B) $375 C) $600 D) $225
D) $225
Millennium Motors has current pretax annual cash flows of $1,000 and is in the 35% tax bracket. The appropriate discount rate for its cash flows is 12%. Suppose the firm issues a $1,500 bond and uses these proceeds to pay a one-time special dividend to shareholders. 74. The cost of equity: What is its value without debt in the capital structure? A) $350 B) $650 C) $2,917 D) $5,417
D) $5,417
M&M Proposition 2: A firm has $300mm in outstanding debt and $900mm in outstanding equity. Its cost of equity is 11%, and its cost of debt is 7%. What is the appropriate WACC? A) 6% B) 8% C) 9% D) 10%
D) 10%
Which of the following should a company consider when deciding to buy or lease an asset? A) Taxes B) Information or transaction costs C) If the choice would affect the real investment policy of the firm D) All of the above
D) All of the above
Which of the following will limit the asset abuse problem for the lessor? A) Track the total services obtained from the asset and charge the lessee based on usage B) Bundle the lease contract with a service contract C) Provide the lessee with the right to buy the asset when the lease expires D) All of the above
D) All of the above
44. Basic services investment bankers provide when bringing securities to market include A) Origination B) Underwriting C) distribution. D) All of the above.
D) All of the above.
47. With a best-efforts underwriting A) the investment banking firm makes no guarantee to sell the securities at a particular price. B) the investment banker does not bear the price risk associated with underwriting the issue. C) compensation is based on the number of shares sold. D) All of the above.
D) All of the above.
Advantages of private placements include: A) Cost of funds may be lower. B) Private lenders are more willing to negotiate changes to a bond contract. C) The speed of private placement deals and flexibility in issue size. D) All of the above.
D) All of the above.
Private equity firms improve the performance of firms in which they invest by: A) making sure that the firms have the best possible management teams. B) closely monitoring each firm's performance and providing advice and counsel to the firm's management team. C) facilitating mergers and acquisitions that help improve the competitive positions of the companies in which they invest. D) All of the above.
D) All of the above.
Which of the following is a reason financial policy might matter? A) Firms must pay corporate income taxes. B) Capital structure choices can affect investment decisions, such as R&D and PP&E. C) Issuing equity is expensive. D) All of the above.
D) All of the above.
Which one of the following statements is NOT true? A) In a competitive sale, the firm specifies the type and amount of securities it wants to sell. B) In a negotiated sale, the issuer selects the underwriter at the beginning of the origination process. C) In a general cash offer, management must decide whether to sell the securities on a competitive or a negotiated basis. D) For equity securities, competitive sales generally provide the lowest-cost method of sale.
D) For equity securities, competitive sales generally provide the lowest-cost method of sale.
M&M Proposition 2: Swirlpool, Inc., has a WACC of 11%, a cost of debt of 8%, and a cost of equity of 12%. What must the debt-to-equity ratio be? A) 1/2 B) 1/4 C) 1/6 D) None of the above.
D) None of the above.
33. Which one of the following statements is NOT true? A) The process by which many entrepreneurs raise "seed" money and obtain other resources necessary to start their businesses is often called bootstrapping. B) Most businesses are started by an entrepreneur who has a vision for a new business or product and a passionate belief in the concept's viability. C) The initial "seed" money usually comes from the entrepreneur or other founders. D) The seed money is spent on developing an initial public offering.
D) The seed money is spent on developing an initial public offering.
M&M Proposition 2 states that the cost of a firm's common stock is related to A) the debt-to-equity ratio. B) the required rate of return on the firm's underlying assets. C) the return of the market index. D) a and b.
D) a and b.
The use of debt financing A) reduces agency costs between the stockholders and management by increasing the amount of risk the managers take. B) increases agency costs between the stockholders and management by limiting the amount of risk the managers take. C) increases agency costs since managers prefer to keep more retained earnings rather than pay a dividend. D) b and c.
D) b and c.
A financial restructuring A) will not change the value of a firm's real assets under M&M Proposition 1. B) includes financial transactions that change the capital structure of the firm. C) means that a firm has issued equity to retire debt. D) both a and b.
D) both a and b.
The optimal capital structure of a firm A) minimizes the cost of financing a firm's projects. B) minimizes interest payments to creditors. C) maximizes firm value. D) both a and c.
D) both a and c.
The use of debt financing A) may cause a manager to take on riskier projects in order to make interest payments. B) is more expensive than issuing equity due to the use of covenants. C) allows managers to make discretionary interest payments. D) limits the ability of managers to waste stockholder money.
D) limits the ability of managers to waste stockholder money.
M&M Proposition 1 assumes all of the following except that A) there are no taxes. B) there are no costs to acquiring information. C) there are no transactions costs. D) the real investment policy of the firm is affected by its capital structure decisions.
D) the real investment policy of the firm is affected by its capital structure decisions.
Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the underpricing on this issue? A) $9,900,000 B) $24,900,000 C) $15,000,000 D) None of the above.
$9,900,000
M&M Proposition 1: What are the interest payments that you receive after you undo the restructuring, and what are your total cash flows? A) $1.58 and $12.38 B) $23.55 and $75 C) $1.125 and $12.38 D) None of the above.
A) $1.58 and $12.38
Which ONE of the following statements is true? A) Under federal securities law, they can be resold to investors in the public markets immediately even if they are not registered. B) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC, usually within 90 days of the PIPE closing. C) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC after 90 days of the PIPE closing. D) PIPE transactions involving a healthy firm can also be executed without the use of an investment bank but result in a cost increase of 7 to 8 percent of the proceeds.
B) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC, usually within 90 days of the PIPE closing.
Which one of the following statements is NOT true? A) For many smaller firms and firms of lower credit standing that have limited access, or no access, to the public markets, the cheapest source of external funding is often the private markets. B) Bootstrapping and venture capital financing are not part of the private market. C) Bootstrapping and venture capital financing are part of the private market. D) Many private companies that are owned by entrepreneurs, families, or family foundations and are sizable companies of high credit quality prefer to sell their securities in the private markets.
B) Bootstrapping and venture capital financing are not part of the private market.
41. Advantages of going public include all EXCEPT A) Larger amount of capital can be raised this way than the amount that can be raised through private sources. B) Publicly traded firms find it harder to attract top management talent. C) Going public can enable an entrepreneur to fund a growing business without giving up control. D) Additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost.
B) Publicly traded firms find it harder to attract top management talent.
Which one of the following statements is NOT true? A) Venture capitalists often require an entrepreneur to make a substantial personal investment in the business. B) Syndication occurs when the originating venture capitalist buys off other venture capitalists involved in the venture. C) Another factor that reduces risk is the venture capitalist's in-depth knowledge of the industry and technology. D) The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the firm's financial performance.
B) Syndication occurs when the originating venture capitalist buys off other venture capitalists involved in the venture.
A firm's overall cost of capital is
B) a weighted average of the costs of capital for the collection of individual projects that the firm is working on.
The interest tax shield A) does not affect the WACC. B) makes it less costly to distribute cash to the security holder through interest payments than through dividends. C) is given by D × (1 - t). D) b and c.
B) makes it less costly to distribute cash to the security holder through interest payments than through dividends
The weighted average cost of capital (WACC) includes A) the required return on equity and required return on underlying firm assets. B) the cost of any debt and the cost of equity. C) the cost of any debt and required return on underlying firm assets. D) none of the above.
B) the cost of any debt and the cost of equity
Provisions that are part of venture capital agreements include A) timing of exit, number of board positions after exit, and what price is acceptable. B) timing of exit, the method of exit, and what price is acceptable. C) the method of exit, number of board positions after exit, and what price is acceptable. D) None of the above.
B) timing of exit, the method of exit, and what price is acceptable.
The three basic costs associated with issuing stock in an IPO are A) price premium, out-of-pocket expenses, and underpricing. B) underwriting spread, out-of-pocket expenses, and underpricing. C) underwriting spread, price premium, and underpricing. D) None of the above.
B) underwriting spread, out-of-pocket expenses, and underpricing.
42. Which ONE of the following statements is true? A) After the IPO, there is a less active secondary market for the firm's shares. B) Only smaller amounts of capital can be raised through an IPO than the amount that can be raised through private sources. C) Publicly traded firms find it easier to attract top management talent. D) Going public can enable an entrepreneur to fund a growing business but not without giving up control.
C) Publicly traded firms find it easier to attract top management talent.
Which of these statements about direct bankruptcy costs is not true? A) Direct bankruptcy costs include the hiring of additional accountants, lawyers, and consultants. B) Direct bankruptcy costs are less than indirect costs. C) Suppliers requiring cash on delivery is part of a firm's direct bankruptcy costs. D) Negotiating with lenders may help a firm reduce direct bankruptcy costs.
C) Suppliers requiring cash on delivery is part of a firm's direct bankruptcy costs.
46. All of the following about a firm-commitment underwriting is true EXCEPT: A) The investment banker guarantees the issuer a fixed amount of money from the stock sale. B) The investment banker actually buys the stock from the firm. C) The issuer bears the risk that the resale price might be lower than the price the underwriter pays. D) The underwriter bears the risk that the resale price might be lower than the price the underwriter pays.
C) The issuer bears the risk that the resale price might be lower than the price the underwriter pays.
A firm's capital structure is the mix of financial securities used to finance its activities and can include all of the following except A) stock. B) bonds. C) equity options. D) preferred stock.
C) equity options.
Tactics that venture capitalists use to reduce the risk of their investment include A) funding the ventures in stages, requiring entrepreneurs to make no personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. D) None of the above.
C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize.
50. Data from the marketplace show that the shares sold in an IPO are typically A) priced between 2 and 5 percent below the price at which they close at the end of first day of trading. B) priced between 10 and 15 percent above the price at which they close at the end of first day of trading. C) priced between 10 and 15 percent below the price at which they close at the end of first day of trading. D) priced between 2 and 5 percent above the price at which they close at the end of first day of trading.
C) priced between 10 and 15 percent below the price at which they close at the end of first day of trading.
In order to calculate the present value of debt tax savings, the _______ is used as the discount rate. A) WACC B) risk-free rate C) required rate of return on debt D) none of the above
C) required rate of return on debt
The three principal ways in which venture capital firms exit venture-backed companies are A) selling to a strategic buyer, buying out the founder, and offering stock to the public. B) selling to a strategic buyer, selling to a financial buyer, and buying out the founder. C) selling to a strategic buyer, selling to a financial buyer, and offering stock to the public. D) None of the above.
C) selling to a strategic buyer, selling to a financial buyer, and offering stock to the public.
Firms have no way to directly estimate the discount rate that reflects the risk of
C) the incremental cash flows from a particular project.
78. Castle Co. needs to borrow $10 million for process improvement upgrades. Management decides to sell 20-year bonds. They determine that the 3-month Treasury bill rate is 2.75 percent, the firm's credit rating is A, and the yield on 20-year Treasury bonds is 1.80 percent higher than that for 3-month Treasury bills. Bonds with an A rating are selling for 50 basis points above the 20-year Treasury bond rate. What is the borrowing cost to do this transaction? a. 4.55% b. 5.05% c. 7.75% d. 9.55%
b. 5.05%
85. LMNO Manufacturing needs a new laser and is comparing buying or leasing. Under either alternative, the company will only need the laser for 5 years. Assume LMNOs marginal tax rate is 30 percent. Purchase Alternative: It would cost $50,000 to purchase the laser and the amount could be financed with a five year balloon loan at 9%. The laser will be depreciated on straight line and have no salvage value. Maintenance on the laser is expected to be $1,200 per year. Lease alternative: The company that manufactures the laser offers a 5 year leasing option with annual lease payments of $12,500.With this option the lessor will be responsible for maintenance of the laser and will take it back after 5 years. The lease will be classified as an operating lease. Which is the best option for LMNO Manufacturing? a. Purchase, the company will be $4,416 better off. b. Lease, the company will be $4,416 better off. c. Purchase, the company is $10,496 better off d. Lease, the company is $10,496 better off
b. Lease, the company will be $4,416 better off.
The initial seed money comes from A) public investors. B) investment banks. C) the entrepreneur or other founders. D) commercial banks.
c
A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment of 500,000 shares priced to the public at $50 a share. The underwriter's spread is 12%. In addition, the underwriter charges $600,000 in legal fees. On the first day of trading, the firm's stock closed at $61. What were the total costs of the issue? a. $3,000,000 b. $3,600,000 c. $8,500,000 d. $9,100,000
d. $9,100,000
