3350 final review problem PDF

Preview

Summary

3350 practice material...

Description

1. Indirect costs of financial distress: A. effectively limit the amount of equity a firm issues. B. serve as an incentive to increase the financial leverage of a firm. C. include direct costs such as legal and accounting fees. D. include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection. 2. Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firms to: A. meet interest and principal payments which if not met can put the company into financial distress. B. make dividend payments which if not met can put the company into financial distress. C. meet both interest and dividend payments which when met increase the firm cashflow. D. meet increased tax payments thereby increasing firm valu e. 3. The possibility of bankruptcy has a negative effect on the value of the firm because: A. increased bankruptcy risk lowers value. B. reorganization is costless but risk is not. C. a bankruptcy has real costs associated with it. D. value enhancing strategies are no longer available. 4. While difficult to determine exactly, studies that have examined direct costs of financial distress put an estimate in the range of 1% to 3% of the firm's market value. A. 1% to 3% B. 3% to 5% C. 5% to 7% D. 7% to 9% 5. Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by: A. by all investors in the firm. B. debtholders only because if default occurs interest and principal payments are not made. C. equityholders because debtholders will pay less providing less cash for the equityholders. D. management because if the firm defaults they will lose their jobs. 6. While difficult to determine exactly, Larry Weiss estimated the distress costs to be about 3.1% of firm value. A. 1% B. 3.1% C. 5-6% D. 8-10%

7. Conflicts of interest between stockholders and bondholders are known as: A. trustee costs. B. financial distress costs. C. dealer costs. D. agency costs. E. underwriting costs. 8. One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy, the firm will: A. rank all projects and take the project which results in the highest expected value of the firm. B. rank all projects and take the project which results in the highest expected value of the firm's bonds. C. rank all projects and take the project which results in the highest expected value of the firm's stock. D. always take the low risk project. 9. The optimal capital structure has been achieved when the: A. debt-equity ratio is equal to 1. B. weight of equity is equal to the weight of debt. C. cost of equity is maximized given a pre-tax cost of debt. D. debt-equity ratio selected results in the lowest possible weighed average cost of capital. 10. When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in: A. no action by debtholders since these are equity holder concerns. B. positive agency costs, as bondholders impose various restrictions and covenants, which will diminish firm value. C. investments of the same risk class that the firm is in. D. undertaking scale enhancing projects. E. lower agency costs, as shareholders have more control over the firm's assets. 11. Indirect costs of bankruptcy are born principally by: A. bondholders. B. stockholders. C. managers. D. the Federal government. E. the firm's suppliers. 12. Junk bonds is a term used to describe bonds: A. of highest quality. B. issued by junk yards. C. with short periods to maturity. D. with low yields to maturity. E. with relatively higher probabilities of default.

13. The main difference between a positive and negative covenants is(are): A. a positive covenant is one you must not do while a negative covenant must be carried out. B. actions that you must do regularly versus periodically. C. a positive covenant is one you must do while a negative covenant is to limit actions the firm can take. D. no difference as they are both restrictive. 14. Covenants restrict the use of leasing and additional borrowings primarily protect: A. the equityholders from added risk of default. B. the debtholders from added risk of dilution of their claims. C. the debtholders from the transfer of assets. D. the management from having to pay agency costs. 15. If the firm issues debt but writes protective and restrictive covenants into the loan contract, then the debt may be issued at a lower interest rate compared with otherwise similar debt. A. significantly higher B. slightly higher C. equal D. lower 16. When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where: A. the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield. B. the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield. C. the increase in the present value of distress costs from an additional dollar of debt is less than the increase of the present value of the debt tax shield. D. distress costs as well as debt tax shields are zero. E. distress costs as well as debt tax shields are maximized. 17. The value of the firm is the sum of all claims against it. These marketed and non-marketed claims: A. increase in value together and are both bought and sold in the financial markets. B. trade-off against one another in value with marketed claims bought and sold in the financial markets but not non-marketable claims. C. decrease in value together and are both bought and sold in the financial markets. D. trade-off against one another in value with both marketed and non-marketed claims bought and sold in the financial markets.

chapter19

1. Distributions to shareholders from capital are called: A. earnings dividends. B. a stock split. C. liquidating dividends. D. stock dividends. E. regular cash dividends. 2. A dividend is usually a cash distribution from: A. current earnings or accumulated retained earnings B. the capital surplus account C. common stock account D. liquidated capital 3. You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased another 100 shares and then on July 22st you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5th to holders of record on Friday, July 23rd. The dividend is payable on July 31st. How much dividend income will you receive on July 31st from ABC? A. $0 B. $220 C. $330 D. $440 E. $550 4. Which of the following is true? A. A 10% stock dividend would increase stockholder wealth by $5 if the current price of stock is $50 (ignoring transaction costs). B. Stock dividends are not true dividends. C. Stock splits involve a small increase (splintering) in total stock outstanding. D. The most common dividend policy involves regular cash payments with year-end bonuses. 5. The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is called (a): A. MM Proposition I. B. capital structure irrelevancy. C. homemade leverage. D. homemade dividends.

6. The KatyDid Co. is paying a $1.25 per share dividend today. There are 120,000 shares outstanding with a par value of $1.00 per share. As a result of this dividend, the: A. retained earnings will decrease by $150,000. B. retained earnings will decrease by $120,000. C. common stock account will decrease by $150,000. D. common stock account will decrease by $120,000. E. capital in excess of par value account will decrease by $120,000. 7. Which of the following lists events in chronological order from earliest to latest? A. Date of Record, Declaration Date, Ex-Dividend Date B. Date of Record, Ex-Dividend Date, Declaration Date C. Declaration Date, Date of Record, Ex-Dividend Date D. Declaration Date, Ex-Dividend Date, Date of Record E. Ex-Dividend Date, Date of Record, Declaration Date 8. In an efficient market, ignoring taxes and time value, A. the price of stock should decrease by the amount of the dividend immediately on declaration date. B. the price of stock should decrease by the amount of the dividend immediately on ex-dividend date. C. the price of stock should increase by the amount of the dividend immediately on declaration date. D. the price of stock should increase by the amount of the dividend immediately on ex-dividend date. 9. The important relationship between the ex-dividend date and the record date is: A. it determines the timing of when the payment is made. B. the record date occurs before ex-dividend date allowing you to sell your stock and still get the dividend payment. C. the ex-dividend date occurs two business days before the date of record, if you purchase the stock before this date you are entitled to the dividend. D. if you hold your stock past the record date and do not sell before the ex-dividend date then you will be taxed at the capital gain rate. 10. Your company has announced a dividend of $2.50 per share. You and the rest of the marginal investors are in the 35% tax bracket. What should happen to the stock price? A. the price of stock should decrease by $1.625 immediately after the date of record. B. the price of stock should decrease by $1.625 immediately after the ex-dividend date. C. the price of stock should decrease by $3.85 immediately after the date of record. D. the price of stock should decrease by $3.85 immediately after the ex-dividend date. 11. On the date of record the stock price drop is: A. a full adjustment for the dividend payment. B. a partial adjustment for the dividend payment because of the tax effect. C. zero because it happened on ex-dividend date. D. zero because it happens on payment date.

12. A firm with a 1,000 stockholders plans to terminate operations at the end of two years. Investors are certain that the firm will generate cash flows of $1,000 at the end of the first year and $50,000 at the end of the second year. The risk-free rate is 10%. Which of the following is true, ignoring transaction costs and taxes? A. The present value of these payments is $42,231 if payments of $1,000 and $50,000 are made. This present value will decrease if the firm borrows to increase payment at the end of the first year. B. The present value of these payments is $42,231 if payments of $1,000 and $50,000 are made. This present value will increase if the firm borrows to increase payment at the end of the first year. C. The present value of these payments is $42,231 if payments of $1,000 and $50,000 are made. This present value will remain the same if the firm borrows to increase payment at the end of the first year. D. The present value of these payments is less than $42,231 if payments of $1,000 and $50,000 are made. This present value will change if the firm borrows to increase payment at the end of the first year. The direction of the change will depend on the type of investors that currently hold stock. E. There is no way to calculate present value without being given the proper discount rate for the firm. The present value would change if the firm borrows to increase payments at the end of year one. 13. Which one of the following is an argument in favor of a low dividend policy? A. the tax on capital gains is deferred until the gain is realized B. few, if any, positive net present value projects are available to the firm C. a preponderance of stockholders have minimal taxable income D. corporate tax rates exceed personal tax rates 14. If you have a choice of receiving a cash payment of $5 today: A. you are indifferent to receiving $5.07 next year if your opportunity cost is 7%. B. you are indifferent to receiving $5.00 next year if your opportunity cost is 7%. C. you are indifferent to receiving $5.35 next year if your opportunity cost is 10%. D. you are indifferent to receiving $5.35 next year if your opportunity cost is 7%. E. you are indifferent to receiving $5.10 next year if your opportunity cost is 10%. 15. Two important elements of the dividend policy irrelevance proposition are: A. all investors have homogeneous dividend needs and time horizons. B. dividends are paid even if a positive NPV opportunity exists and investors can re-arrange their own dividend streams. C. investors can re-arrange their own dividend streams and the investment policy is set and unaltered by the change in dividend policy. D. all investors have homogeneous dividend needs and dividends are paid even if a positive NPV opportunity exists. E. investors can re-arrange their own dividend streams and the source of financing must be debt.

Chapter30

1. In a merger or acquisition, a firm should be acquired if: A. it generates a positive net present value to the shareholders of an acquiring firm. B. it is a firm in the same line of business, in which the acquirer has expertise. C. it is a firm in a totally different line of business which will diversity the firm. D. it pays a large dividend which will provide cash pass through to the acquirer. 2. One company wishes to acquire another. Which of the following forms of acquisition does not require a formal vote by the shareholders of the acquired firm? A. Merger. B. Acquisition of stock. C. Acquisition of assets. D. Consolidation. 3. Firm A and Firm B merge to form firm AB. This is an example of: A. a tender offer. B. an acquisition of assets. C. an acquisition of stock. D. a consolidation. 4. Dissatisfied shareholders of the acquired firm in a merger can: A. decide not to tender their shares. B. exercise their appraisal rights and demand their shares be purchased at fair value. C. decide not to vote for the current management by proxy. D. do nothing and are stuck with the outcome. 5. Which of the following is not true of mergers? A. Mergers are legally simple. B. Mergers must be approved by a vote of the stockholders of each firm. C. In a merger, the acquiring firm retains its name and identity. D. Mergers represent a public offer to buy shares directly from the stockholders of another firm. 6. The complete absorption of one firm by another is called a: A. merger. B. consolidation. C. takeover. D. spin-off.

7. The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called: A. goodwill. B. the merger cost. C. the consolidation effect. D. synergy. 8. Suppose that Verizon and Sprint were to merge. Ignoring potential antitrust problems, this merger would be classified as a: A. horizontal merger. B. vertical merger. C. conglomerate merger. D. monopolistic merger. 9. Suppose that General Motors has made an offer to acquire General Mills. Ignoring potential antitrust problems, this merger would be classified as a: A. monopolistic merger. B. horizontal merger. C. vertical merger. D. conglomerate merger. 10. Suppose that Exxon-Mobil acquired Schlumberger, an exploration/drilling company. Ignoring potential antitrust problems, this merger would be classified as a: A. monopolistic merger. B. vertical merger. C. conglomerate merger. D. horizontal merger. 11. If the All-Star Fuel Filling Company, a chain of gasoline stations acquire the Mid-States Refining Company, a refiner of oil products, this would be an example of a: A. conglomerate acquisition. B. white knight. C. vertical acquisition. D. going-private transaction. E. horizontal acquisition. 12. Which of the following is not true of an acquisition of stock or tender offers? A. No stockholder meetings need to be held. B. No vote is required. C. The bidding firm deals directly with the stockholders of the target firm. D. In most cases, 100% of the stock of the target firm is tendered.

13. If the acquiring firm and acquired firm are not related to each other, then the acquisition is known as A. consolidation B. aggregation C. Takeovers D. Conglomerate acquisition 14. Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting is being used? A. consolidation B. aggregation C. purchase D. pooling 15. Synergy occurs when the: A. added value is positive from the combination. B. sum of the parts is grater than the whole. C. premium paid to the acquired shareholders equals the NPV D. standstill agreement is effected. 16. If Microsoft were to acquire Air Canada, the acquisition would be classified as a _____ acquisition. A. horizontal B. longitudinal C. conglomerate D. vertical 17. The synergy of an acquisition between Firm A and Firm B can be determined by: A. subtracting the change in cost from the change in revenue. B. subtracting the change in taxes form the change in revenue. C. subtracting the change in capital requirements from the change in revenues. D. discounting the change in the cash flows of the combined firm by the risk adjusted discount rate. E. discounting the change in the revenues of the combined firm by the risk adjusted discount rate. 18. The value of synergy is estimated by the equation: A. VA+ VB- 'Revenue. B. VAB- VA- VB. C. VAB- VB - Taxes. D. VA- VB- 'Costs.

19. An important reason for acquisitions is that the combined firm may generate greater revenue that the two separate firms could. Examples of revenue enhancement would not include: A. an elimination of a previously ineffective media effort. B. an elimination of a previously ineffective advertising effort. C. an elimination of a weak existing distribution effort. D. economies of scale. 20. An acquisition may take place because of a real or perceived strategic advantage. An example of a strategic advantage would be: A. an aircraft manufacturer buying a laser guidance company for possible advanced flight control without pilots. B. a manufacturer integrating their supply by acquiring downline. C. a corporation completing a spin-off. D. a corporation out-sourcing to achieve cost economies. 21. A merger that improves the use of one company's design team and the other company's testing group is evidence of: A. replacement of inefficient management. B. one company exercising monopoly power. C. complementary resources. D. minimizing the net operating losses. 22. The market for corporate control is a phrase that would not describe: A. a shift in management motivated to increase the value of the firm. B. top management restructuring of the company. C. an elimination of managerial inefficiency. D. the system where corporate insiders trade personal stock holdings. E. alternative management teams competing for the rights to management 23. Cowboy Curtiss' Cowboy Hat Company recently completed a merger. When valuing the combined firm after the merger, which of the following is an example of the type of common mistake that can occur? A. The use of market values in valuing either the new firm. B. The inclusion of cash flows that are incremental to the decision. C. The use of Curtiss' discount rate when valuing the cash flows of the entire company. D. The inclusion of all relevant transactions cost associated with the acquisition. Chapter22

1. In a lease arrangement, the owner of the asset is: A. the lesser. B. the lessee. C. the lessor. D. the leaser.

2. In a lease arrangement, the user of the asset is: A. the lesser. B. the lessee. C. the lessor. D. the leaser. 3. Which of the following would not be a characteristic of a financial lease? A. They are not usually fully amortized. B. They usually require the lessor to maintain and insure the leased assets. C. They usually do not include a cancellation option. D. The lessee usually has the right to renew the lease at expiration. 4. An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases. A. leveraged; direct. B. sales and leaseback; sales-type. C. capital; sales-type. D. direct; sales-type. 5. The city of Oakville sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of: A. an operating lease. B. a short-term lease. C. a sale and leaseback. D. a fully amortized lease 6. If the lessor borrows much of the purchase price of ...