mang 2

Delta Corporation has an issue of preferred stock outstanding that has a $100 par value and a stated annual dividend of $9.00. The required return on the preferred stock is estimated to be 8%. What is the value of the preferred stock?

112.50

The ABC Company has common stock which has a required return in the market of 13%. The stock is expected to pay dividends of $1.50 per share and the dividends are expected to grow at 7% per year to infinity. What would you pay for a share of ABC Company stock?

25 dollars, dividend divided by (required return-dividend growth)

A firm has fixed operating costs of $253,750, a sales price per unit of $100, and a variable cost per unit of $65. The firm's operating breakeven point in dollars is

725,000

As debt is substituted for equity in the capital structure and the debt ratio increases, all of the following statements about the component costs of capital are true EXCEPT a. the cost of equity continually increases b. the weighted average cost of capital first declines, reaches a minimum, and then rises again c. the weighted average cost of capital continually increases d. the cost of debt continually increases

C. the weighted average cost of capital continually increases

____________is the amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders. a. Book value b. Intrinsic value c. Market value d. Liquidation value

D Liquidation value

Although IPOs on average provide below average first-day returns, their long-term returns over the following 3 years are well above average. TF

False

Preferred stock is a special form of stock having a fixed dividend that must be paid prior to payment of any interest outstanding. TF

False

The term venture capital refers to long-term loans made to start-up businesses. TF

False- bc they receive equity

A "seasoned offering" is the sale of securities by firms which already have securities that are publicly traded. True False

True

Firms having stable and predictable revenues can more safely undertake highly leveraged capital structures than firms with volatile patterns of sales revenue. TF

True

One potential benefit of high operating leverage is that it can reduce the average cost per unit at high levels if output, thus generating a competitive cost advantage. TF

True

The more debt a company has in its capital structure, the more EPS will change for a given change in EBIT. TF

True

____________is the process where the firm and its investment bankers take a tour of major cities to solicit demand for their IPO from investors. a. Red herring b. Road show c. Capital countdown d. Equity swap

b. Road show

Venture capitalists normally cash out of their investments a. through the sale of a firm's fixed assets. b. when the firm swaps equity for debt. c. when the firm has an initial public stock offering d. when the firm's bonds mature.

c. when the firm has an ipo

If firm A has a degree of operating leverage of 3 and its sales increase by 9%, then its: a. EPS will increase by 276 b. EBIT will increase by 39% c. EPS will increase by 3% d. EBIT will increase by 27%

d. EBIT will increase by 27%

Generally______ in leverage result in _________Return and ________ risk

decreases, decreased, decreased

The inexpensive nature or long-term debt in a firm's capital structure is due in large. part to the fact that

interest payments are tax deductible.

The__________is a document where detailed information about a new public security offering is made available to potential investors

prospectus

The degree of operating leverage utilized by a firm is a function of: a. the firm's capital structure b. the firm's cost of borrowing c. the extent to which fixed costs are used in the firm's operations d. all of the above

the extent to which fixed costs are used in the firm's operations

According to the traditional approach to capital structure, the value of the firm will be maximized when: a. the cost of equity is equal to the cost of debt. b the weighted average cost of capital is minimized.c. the cost of debt is minimized. d. the financial leverage is maximized.

the weighted average cost of capital is minimized.