quiz 3 mgmt 109
estimated return
(expected price-current price)+ dividend= x..... x/ current price
The beta of the market portfolio is
+1.0
If a firm uses the same company cost of capital for evaluating all projects, which situation(s) will likelyoccur?
1,2,3. ) The firm will reject good low-risk projects, The firm will accept poor high-risk projects, AND The firm will correctly accept projects with average risk
stock repurchase methods:
1. buy share on the market 2. tender offer to shareholders 3. dutch auction 4. private negotiation (green mail)
why repurchases> dividends
1. to dispose of excess cash.. 2. to make big changes in capital structure... 3. avoid a commitment
Two Fund Separation Theorem
2 main sources of portfolio returns-- risk free rate AND market exposure w the assumption that markets are efficient.
How can an investor earn more than the return generated by the tangency portfolio and still stay on the securitymarket line?
Borrow at the risk-free rate and invest in the tangency portfolio.
Which of the following lists events in chronological order from earliest to latest?
Declaration date, ex-dividend date, record date
Which of these dates, when arranged in chronological order, occurs last?
Dividend payment date
debt
EBIT and ROIC
direct costs
IPOS, SEOS, convertibles, bonds
The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:
Investment policy is independent of dividend policy.
The capital asset pricing model (CAPM) states which of the following?
The expected risk premium on an investment is proportional to its beta.
Trade off theory
Theory that capital structure is based on a trade-off between tax savings and distress costs of debt
Suppose a firm sets aside assets to protect particular investors such as debt holders. These assets are called
collateral.
declaration date
company declares regular quarterly dividend
Using a company's cost of capital to evaluate a project is
correct for projects that have average risk compared to the firm's other assets
payment date
dividend checks are mailed
record date
dividend will be paid to shareholders registered on this date
Firms can pay out cash to their shareholders in the following way(s):
dividends and share repurchases.
Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because:
dividends are taxed when distributed, while capital gains are deferred until the stock is sold.
Complete the following sentence. The cost of capital is the same as the cost of equity for firms that are financed...
entirely by equity
Select the answer that best completes the following sentence. By combining lending and borrowing at the risk-free rate with efficient portfolios, we can
extend the range of investment possibilities, change the set of efficient portfolios from being curvilinear to a straight line, and provide a higher expected return for any level of risk, except for the tangential portfolio and the risk-free asset.
The company cost of capital is the correct discount rate for any project undertaken by the company.
false
If external finances are required...
firms issue the safest securities first like debt and then hybrid securities
pecking order theory
firms prefer to issue debt rather than equity if internal finance is insufficient
setting dividend policy
forecast capital needs (often 5 yrs), set target capital structure, estimate annual equity needs, set target payout, maintain target dividend growth rate
FCFF
free cash flow to the firm
Security Market Line (SML)
graphical representation of the expected return-beta relationship of the CAPM
issuing firms want
high prices
the hurdle rate should be _________ for riskier projects
higher
higher debt means
higher interest expense is tax deductible
Higher expected return is accompanied by _______________.
higher risk
compare the required return to an estimate
if they are equal they are properly valued
Leverage can ________________ expected ROE, but adds _______________.
improve; risk
Leverage _______ performance in better scenarios and _________ in a bad scenario
improves; makes things worse
The main advantage of debt financing for a firm is that
interest expenses are tax deductible.
investment theory
investment theory suggests that an investment is an adjustment to the capital stock over a specific period
tax preference
investors prefer low payout, hence the growth
basic earnings power is ________ by debt.
is unaffected
lead underwriter customers are:
issuing firms, investors
investors want
low prices
Higher interest expense means
lower income before taxes which means lower taxes
implied market risk premium
market rate- risk free rate
residual model advantages
minimizes new stock issues and flotation costs
indirect costs
money on the table/ end of the day price
primary/new markets
new securities are sold and funds go to the issuer company..
CAPM
optimal allocation line for investors
Capitla market line
optimal allocation line for investors
if required return is > estimated return
overvalued
secondary/ old markets
previously issued securities that are bought and sold by investors
When a company sells an entire issue of securities to a small group of institutional investors like life insurancecompanies, pension funds, and so forth, it is called a(an)
private placement.
Generally, underwriters provide the following services to the issuing firm (issuance of stock, for example):
provide advice, buy some or all of the new issue, and resell the issue to the public.
portfolio theory
quantifies risk, focuses on diversification, and adding low correlated assets
forms of distribution/ dividend payments
regular cash div, special cash div, stock div, stock repurchase
When a firm improves (lowers) its days of inventory it generally:
releases cash locked up in inventory.
disadvantages to residual model
results in variable dividends, sends conflicting signals, increases risk, and doesn't appeal to any specific clientele
ex dividend date
shares start to trade ex dividend
When comparing levered vs. unlevered capital structures, leverage works to increase EPS for higher levels of operating income because interest payments on the debt
stay fixed, leaving more income to be distributed over fewer shares.
utility maximization investors use
the Markowitz Model of portfolio diversification to optimize risk and return
Dividend policy changes are decided and announced by
the board of directors.
if the firm has less cash
the firm first draws down cash balance or sells marketable securities
CAPM utilizes the idea of
the risk free asset and markets being efficient meaning they are completely competitive and frictionless
if the firm has more cash
they pay off debt or invest in marketable securities
This question is to help with a conceptual background of Beta as a measure of risk. An analyst computes a beta coefficient with a low standard error. This implies that
this particular beta is more reliable than most.
An analyst should evaluate each project at its own opportunity cost of capital. The true cost of capital depends on the particular use of that capital.
true
Financial leverage increases the expected return and risk of the shareholder.
true
Investors require higher returns on levered equity than on equivalent unlevered equity.
true
Most firms have long-run target dividend payout ratios.
true
Generally, initial public offerings (IPOs) are
underpriced.
if required return is < estimated return
undervalued
EV
value of the firm
what is needed in order to optimize a portfolio according to portfolio theory
variance/standard deviation, expected return, correlation
WACC
weighted average cost of capital
bird-in-the-hand
when investors prefer a high payout