MBA 702 - 5-1 and 2 Final Exam

A company's current cost of capital is based on:
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Terms in this set (65)
A company's current cost of capital is based on:
returns currently required by
debt and stock holders
Will increase a company's cost of equity if the company computes that cost using the SML approach?

Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.
decrease in Rf (remember SML)
Assume Russo's has a debt-equity ratio of .4 and uses the CAPM for cost of equity. The company's CoE is
dependent upon a reliable estimate of the market risk premium.
A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith Inc.

What is the return that these individuals require on this investment called?
Cost of equity (remember common)
Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the:
cost of debt
Which one of these will increase a company's aftertax cost of debt?
decrease tax rate (remember aftertax debt)
The cost of preferred stock is computed the same as the:
rate of return on a perpetuity.
A company's weighted average cost of capital:
return investors require on the total assets
The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the company's capital structure is called the:
weighted average cost of capital.
If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to:
increase the average risk level of the company over time.
The subjective approach to project analysis: assigns discount rates to projects based on the discretion of the ___________________of a firm. **the firm places projects into one of several risk classes. The discount rate used to value the project is then determined by adding (for high risk) or subtracting (for low risk) an adjustment factor to or from the firm's WACC.senior mgrsWhen a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the ________ approach.pure playWhich one of these describes an exception to the registration filing requirement of the SEC?less than $5 millionSecurities and Exchange Commission (SEC) reviews _____________to ensure they comply with current laws and regulationsregistration statementsA prospectus is document that describes the details of a ______________ along with relevant information about the issuerproposed security offeringWhich one of the following is a preliminary prospectus?Red herringAdvertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:tombstonesWhat is an issue of securities that is offered for sale to the general public on a direct cash basis called?General cash offerExecutive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n)UnderwriterAlberto 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 offer called?Rights offerUnderwriters generally: a. pay a spread to the issuing firm. b. provide only best efforts underwriting in the U.S. c. accept the risk of selling the new securities in exchange for the gross spread d. market and distribute an entire issue of new securities within their own firm. e. pass the risk of unsold shares back to the issuing firm via a firm commitment agreementAccept riskA syndicate can best be defined as a group of underwriters sharing the____________ a new issue of securitiesrisk of sellingJones & 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 of $26.50 a share. What type of underwriting was this?Firm commitmentBlue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2% and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes the underwriting.Dutch auctionThe 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _______ period.*quietMobile units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which of the following?Green Shoe provisionA key goal of the aftermarket period is support the market price for a ________________new securities issueWith Dutch auction underwriting: A. each winning bidder pays the price he or she bid. B. all successful bidders pay the same price. C. all bidders receive at least a portion of the quantity for which they bid. D. the selling firm receives the maximum possible price for each security sold. E. the bidder for the largest quantity receives the first allocation of securities.B. same price per shareIPO do not always provide better returnsto issuing firmsExisting shareholders:may or may not have a __________ to newly issued shares.pre-emptive rightBefore a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. What terms best describes this situation?% ownership dilutionPearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this?shelf registrationShelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:2 yearsA firm should select the capital structure that: A. produces the highest cost of capital. B. maximizes the value of the firm. C. minimizes taxes. D. is fully unlevered. E. equates the value of debt with the value of equity.maximizes value of the firmThe value of a firm is maximized when the:WACC is minimizedThe optimal capital structure has been achieved when the:debt-equity ratio results in the_______________ WACClowest possibleAssume you are reviewing a graph that plots EPS against EBIT. The steeper the slope the greater the __________ change to changes in _______sensitivity of EPS EBITBreak-even point between a levered and unlevered capital structure at the break-even level, the company is earning just enoughto pay cost of debtM&M Proposition II without taxes, required return on assets (rA) is = toWACCBusiness risk of co. has a positive relationship with company'scost of equity____________risk is the equity risk most related to the daily operations of firmBusinessFinancial risk is dependent upon a company'scapital structure______________-states the value of a co. is unrelated to the company's capital structureM&M I, no taxWestover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. What describes the tax savings?INterest tax shieldM&M I implies with tax implies that WACC decreases as the ___________increasesD/E RationInterest tax shield is a key reason why the ________is generally ______ than the cost of equitycost of debt lessExplicit costs (legal admin fees) with default co. are classified as ________costsdirect bankruptcyCosts incurred to avoid bankruptcyindirect costsCo borrows up to point where marginal benefit of interest tax shield from increased debt is just = to marginal expense of the resulting increase in financial distress costsstatic theory of capital structurediv payments to shareholders claims of stockholders and bondholdersmarketed claimsThe optimal capital structure minimizes the _________of that company'svalue marketed claimsa dividend is never a liability of the issuer until it isdeclared cash dividendsUnited Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. What is the ex-dividend date?Wed, Oct 29Bailey's decided on Friday, March 7 to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?Thu Mar, 20Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries declared a dividend on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information?Kate is entitled Ted is notA $.45 quarterly cash payment paid by Jones Co. to shareholders in the normal course of business become a liability of the company on thedeclaration dateThe ex-dividend date is defined as _____ business day(s) before the date of record.2Date used to determine names of shareholders who will receive a divdate of recordThis dividend is one time eventSpecialFact that floatation costs can be significant is an argument for maintaining a low div policy and ___________ extra dividendsrarely issuingFinancial Markets reaction to change in amount of Co. dividendinformation content effectThe common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to by which one of the following terms?clienteleHJ Corporation has excess cash and has opted to buy some of its shares of outstanding common stock. What is this process of buying called?Stock RepurchaseSame as cash dividend program provided there are no taxes or other costsStock repurchase programDoe snot effect the total equity of a company but does increase the # of shares outstanding ?Stock Split