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Business Finance Chapters 14-18

Terms in this set (92)

The euro is
a common currency with monetary policy controlled by the European Central Bank.
Corporations prefer bonds over preferred stock for financing their operations because:
the after-tax cost of debt is less than the cost of preferred stock.
When examining the size and efficiency of financial markets, we want to distinguish between:
the value of securities outstanding and the trading activity of the market.
A random walk:
suggests non correlation between past and future price movements.
Well-functioning capital market include the following attributes except?
Liquidity
Static prices***
Competitiveness
Transparency
Financial intermediaries channel funds into the capital markets from the household sector.
True
Capital markets consist of securities having maturities greater than one year.
True
Without financial intermediaries the cost of funds would be about the same as with financial intermediaries.
False
Brokers on an organized stock exchange act as an agent for the person buying or selling securities.
True
Markets are efficient when prices adjust rapidly to new information, continuous markets exist, and large dollar trades can be absorbed without large price movements.
True
Over the last decade, long-term federal government securities outstanding have grown at a faster rate than corporate debt securities outstanding.
False
Many Canadian international companies have listed their shares on more than one exchange outside of the country to gain access to these broader capital markets.
True
Good regulation requires a system that establishes strong enforcement of rules and standards with effective penalties for abuses.
True
Discuss the challenges Canadian Exchanges (e.g., TSX) face. What is the TSX doing to be more competitive on a global scale?
-to address the threat of competion from the U.S. capital market, the Canadian markets have cordinated their efforts and specialized. the TSX, is seeking links with other global markets to allow 24-hour trading, and has allowed the trading of interlisted stocks in both Canadian and U.S. dollars.
- Canada has thin secondary markets with significant price effects occuring with large transactions. To reduce this relatively higher price of liquidity, the Toronto Stock Exchange has been urging a larger role for dealers acting as principals rather than brokers in stock trading.
-"upstairs rooms" are a threat to Canadian markets as dealers match large trades in shares between institutional investors through their own trading floors. The TSX has established an electronic call market for the Canadian markets to counteract this upstairs trading.
The function of the managing investment dealer includes:
forming an underwriting syndicate, preparing a prospectus, distributing shares to the selling group.
The market stabilization function usually:
provides price support for the stock during the distribution period.
Dilution of earnings occurs because:
a new issue of common stock creates more shares outstanding that reduces earnings per share temporarily.
Underpricing occurs:
to aid in the market's reception of the securities.
Which of the following is a characteristic of leveraged buyouts?
Funds for the buyout are raised through securities markets.
Bindex has net income of $2,500,000 and 1,000,000 shares outstanding. Its common stock is currently selling for $40 per share. It needs to raise $3,610,000 in funds for a new asset. Its investment dealer plans to sell an issue of common stock to the public for $38 for a spread of 5% on offer price. How much must Bindex's after-tax income increase to prevent dilution of EPS?
$250,000
A company's value, based on the assumption that its divisions being sold individually, is called ___________ value.
breakup
Investment dealers are responsible for all the following except:
trading securities.
An investment dealer spread is:
included in the flotation cost.
Laura's Design is about to go public. Its present shareholders own 800,000 shares. The new public issue will represent 1,200,000 shares. The shares will be priced at $30 to the public with a 5% spread. The out-of-pocket costs will be $700,000. What are the net proceeds to the firm?
$33,500,000
The whole area of investment underwriting is becoming more competitive.
True
If a stock has a strong after-market, selling shareholders in the initial distribution will be pleased.
False
Large well-established investment dealers often distribute new issues on a best-efforts basis.
False
The investment industry functions include merger and acquisition services, advisory services, and international investment banking services.
True
Private placement eliminates the expensive registration process with the securities commission.
True
Bank purchases of investment dealers have nearly eliminated competition in the investment industry.
False
Initial Public Offerings peaked on the Toronto Stock Exchange in 2009 after the market downturn.
False
The movement of non-brokerage firms into the investment area has forced traditional securities firms to expand their capital base.
True
In today's market environment, most investment houses specialize in underwriting and do not engage in the dealer-broker function.
False
An indenture is:
the contract between a corporation and a trustee acting for bondholders.
The dollar interest received divided by the market price of the bond is called the:
current yield.
Ajax Corp. has a bond with a coupon rate of 12%, maturing in 15 years at $1,000 per bond. The current market price is $960. What is the current yield?
12.6%
The higher the tax rate, the ______ the net underwriting cost on the new bond issue.
lower
To prevent the weakening of debt holder claims, an indenture includes:
restrictive covenants.
The best measure of an investor's rate of return is:
the yield to maturity.
Formal liquidation is recommended when reorganization is not feasible and out-of-court settlements cannot be reached. Which is the order of priority for claims against the firm?
Lawyer's fees, wages, source deductions, secured creditors, unsecured creditors.
A bond with a coupon rate of 7.5% paid semi-annually, maturing in 5 years at a value of $1,000, and a current market price of $710, will have a yield to maturity of:
16.2%
The call feature is usually advantageous to the bondholder.
False
If an investor expects interest rates to go up, the investor should sell a long-term bond now.
True
Costs of bond refunding are the call premium and the underwriting cost on the new bond issue.
True
Long-term bond prices are more volatile than short-term bond prices given an equal percentage change in the interest rate.
True
The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond.
True
The decision to lease rather than purchase will not be affected by the method of amortization used under the purchase method.
False
A firm may be technically insolvent even though it has a positive net worth.
True
Bankruptcy refers to a circumstance where a firm is unable to pay its bills as they come due.
True
Establishing a creditor committee to run the business is a type of in-court settlement.
False
The three highest priority levels in bankruptcy include the cost of administering the proceedings, past wages due to workers, and overdue interest payments to creditors.
False
Under a sinking-fund provision, semi-annual or annual contributions are made by the corporation into a fund administered by the trustee for purposes of debt retirement.
True
Strip Bonds
Long-term debt securities issued by the Government of Canada (and some provinces) that do not offer coupon payments
Preferred stock may be good for a company because it:
expands the capital base of the firm without diluting the common stock ownership.
A proxy is:
an authorization of a registered shareholder to another person to act in his place at the general meeting.
If a preferred stock is of the cumulative type:
unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common shareholders.
The disadvantage of a rights offering is:
shareholders who do not exercise or sell rights will have their ownership diluted.
To the corporate investor, preferred stock offers which of the following advantages?
100% of preferred dividends are tax-exempt.
When comparing common stock of the same company it is fair to say that:
companies sometimes have two different classes of shares with unequal rights to dividends and votes.
Nine rights are necessary to purchase one share of stock $99. A right sells for a $7.70. The ex-rights value of the stock is:
$168.30.
A "poison pill":
may lower the potential for maximizing shareholder value by discouraging potential high takeover bids.
Corporation A is issuing preferred stock yielding 9%, and Corporation B is considering buying the stock. Corp A's tax rate is 23% and Corp B's tax rate is 39%. What is the after-tax preferred yield for Corp A?
9%
SED Corporation's shares are currently trading at $52.50. Shareholders have the right to buy 1 share of SED for every 5 rights they own at a price of $48.00. SED's rights trade at $_________?
$.75
Common stockholders have a residual claim to income; in other words they are last in line during an elimination of the company.
True
The difference between the rights-on and ex-rights common stock price is equal to the value of a right.
True
Participating preferred stock is advantageous to common shareholders.
False
Floating rate preferred stock allows shareholders to receive more or less than the quoted dividend based on the firm's success.
False
Common shareholders have a legal claim to dividend income.
False
Share classes may differ in both voting rights and dividend rights.
True
The type of shareholder voting has become less important with the influence of takeover, leveraged buyouts, and other challenges to management control.
False
A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids.
False
Convertible exchangeable preferred shares give the holder the sole right to exchange their preferred shares for common shares.
False
Preferred and common stock dividends are a deductible expense for a corporation.
False
CBA Inc. has 400,000 shares outstanding with a $5 par value. The shares were issued for $12. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 6%.
How many shares will be outstanding after the stock dividend?
424,000
Inflation can affect dividend payouts in that:
corporations are hesitant to pay dividends from inflation-caused "inventory profits."
The clientele effect is concerned with:
investor behaviour and attitudes towards dividends.
In the maturity stage, a firm:
is growing about the same rate as the economy as a whole.
In which phase of the life cycle would one most likely encounter stock dividends?
Phase II and Phase III
According to the law, dividends may be funded from:
current earnings.
Phil's Corp. (PC) reported AT Earnings of $15,000,000. PC has 2,150,000 shares outstanding and has excess cash on hand of $5,500,000. PC stock is currently trading at $62 a share.
PC's EPS prior to any share repurchase would be _________.
$6.98
Investors should try to invest in tax-exempt retirement accounts to try to avoid the higher taxes placed on some investments.
True
The dividend yield is defined by the amount of return the stockholder is getting in the form of cash dividends compared to the stock market price.
True
A firm will pay dividends if it has cash available.
False
Corporations are usually exempt from taxes on dividends received from other corporations.
True
Stock dividends may be utilized to provide information to investors about growing companies.
True
Shareholders in general prefer large dividends to small dividends.
False
Dividend reinvestment plans provide the shareholder an opportunity to buy additional shares of stock with the cash dividend paid by the company.
True
Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future.
True
A major drawback to an investor is that dividends are viewed as a passive variable, so a fixed income is never guaranteed.
True
Because the investor is taxed whether dividends are received or not, there are no real advantages to a dividend reinvestment plan.
False
The main concern over the investor preference for dividends or reinvestment is centred on tax implications.
True
By employing a dividend reinvestment plan, a company is assured of increasing cash flow into the company.
False
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