Corporate Finance- Quiz 3

If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:I. reject some positive net present value projects.II. accept some negative net present value projects.III. favor high risk projects over low-risk projects.IV. increase its overall level of risk over time. I, II, III, and IVI. reject some positive net present value projects.II. accept some negative net present value projects.III. favor high risk projects over low risk projects.IV. increase its overall level of risk over time.
Which one of the following statements concerning venture capitalists is correct?A. Venture capitalists assume management responsibility for the firms they finance.B. Exit strategy is a key consideration when selecting a venture capitalist.C. Venture capitalists limit their services to providing money to start-up firms.D. Most venture capitalists are long-term investors in a firm.E. A venture capitalist normally invests in a new idea and finances that idea until the newly-formed firm can issue an IPO. Exit strategy is a key consideration when selecting a venture capitalist.
What is an issue of securities that is offered for sale to the general public on a direct cash basis called?A. best efforts underwritingB. firm commitment underwritingC. general cash offerD. rights offerE. herring offer general cash offer
The dividend growth model:A. is only as reliable as the estimated rate of growth.B. can only be used if historical dividend information is available.C. considers the risk that future dividends may vary from their estimated values.D. applies only when a firm is currently paying dividends.uses beta to measure the systematic risk of a firm. is only as reliable as the estimated rate of growth.
Which one of the following statements is correct?A. The subjective approach assesses the risks of each project and assigns an adjustment factor that is unique just for that project.B. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.C. Firms will correctly accept or reject every project if they adopt the subjective approach.D. Mandatory projects should only be accepted if they produce a positive NPV when the firm’s WACC is used as the discount rate.E. The pure play approach should only be used with low-risk projects. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
Existing shareholders:A. may or may not have a preemptive right to newly issued shares.B. must purchase new shares whenever rights are issued.C. are prohibited from selling their rights.D. are generally well advised to let the rights they receive expire.E. can maintain their proportional ownership positions without exercising their rights. may or may not have a preemptive right to newly issued shares.
Which one of the following is the primary determinant of a firm’s cost of capital? A. debt-equity ratioB. applicable tax rateC. cost of equityD. cost of debtE. use of the funds use of the funds
The weighted average cost of capital for a wholesaler:A. is equivalent to the aftertax cost of the firm’s liabilities.B. should be used as the required return when analyzing a potential acquisition of a retail outlet.C. is the return investors require on the total assets of the firm.D. remains constant when the debt-equity ratio changes.E. is unaffected by changes in corporate tax rates. is the return investors require on the total assets of the firm.
A firm’s overall cost of equity is:A. is generally less that the firm’s WACC given a leveraged firm.B. unaffected by changes in the market risk premium.C. highly dependent upon the growth rate and risk level of the firm.D. generally less than the firm’s aftertax cost of debt.E. inversely related to changes in the firm’s tax rate. highly dependent upon the growth rate and risk level of the firm
Which one of the following statements is correct concerning the costs of issuing securities?A. Domestic bonds are generally more expensive to issue than equity IPOs.B. Abnormal returns are rarely associated with seasoned issues.C. A seasoned offering is typically more expensive on a percentage basis than an IPO.D. There tends to be substantial economies of scale when issuing securities.E. The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of issuing straight debt. There tends to be substantial economies of scale when issuing securities.
Which one of the following statements concerning venture capital financing is correct?A. Venture capitalists desire shares of common stock but avoid preferred stock.B. Venture capital is relatively easy to obtain.C. Venture capitalists rarely assume active roles in the management of the financed firm.D. Venture capitalists often require at least a forty percent equity position as a condition of financing.E. Venture capital is relatively inexpensive in today’s competitive markets. Venture capitalists often require at least a forty percent equity position as a condition of financing.
Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public?A. select an underwriterB. obtain SEC approvalC. gain board approvalD. prepare a registration statementE. distribute a prospectus gain board approval
What is a prospectus?A. a letter issued by the SEC authorizing a new issue of securitiesB. a report stating that the SEC recommends a new security to investorsC. a letter issued by the SEC that outlines the changes required for a registration statement to be approvedD. a document that describes the details of a proposed security offering along with relevant information about the issuerE. an advertisement in a financial newspaper that describes a security offering a document that describes the details of a proposed security offering along with relevant information about the issuer
Flotation costs for a levered firm should:A. be ignored when analyzing a project because they are not an actual project cost.B. be spread over the life of a project thereby reducing the cash flows for each year of the project.C. only be considered when two projects are mutually exclusive D. be weighted and included in the initial cash flow.E. be totally ignored when internal equity funding is utilized. be weighted and included in the initial cash flow.
The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?I. firms that have a 100 percent retention ratioII. firms that pay a constant dividendIII. firms that pay an increasing dividendIV. firms that pay a decreasing dividend II, III, and IV onlyII. firms that pay a constant dividendIII. firms that pay an increasing dividendIV. firms that pay a decreasing dividend
The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period. A. silentB. quietC. lockupD. greenE. red quiet
The pre-tax cost of debt:A. is based on the current yield to maturity of the firm’s outstanding bonds.B. is equal to the coupon rate on the latest bonds issued by a firm.C. is equivalent to the average current yield on all of a firm’s outstanding bonds.D. is based on the original yield to maturity on the latest bonds issued by a firm.E. has to be estimated as it cannot be directly observed in the market. is based on the current yield to maturity of the firm’s outstanding bonds.
The weighted average cost of capital for a firm may be dependent upon the firm’s:I. rate of growth.II. debt-equity ratio.III. preferred dividend payment.IV. retention ratio. I, II, III, and IVI. rate of growth.II. debt-equity ratio.III. preferred dividend payment.IV. retention ratio
A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting. A. standbyB. best effortsC. firm commitmentD. direct feeE. tombstone standby
The weighted average cost of capital for a firm is the:A. discount rate which the firm should apply to all of the projects it undertakes.B. rate of return a firm must earn on its existing assets to maintain the current value of its stock.C. coupon rate the firm should expect to pay on its next bond issue.D. minimum discount rate the firm should require on any new project.E. rate of return shareholders should expect to earn on their investment in this firm. rate of return a firm must earn on its existing assets to maintain the current value of its stock.
The discount rate assigned to an individual project should be based on: A. the firm’s weighted average cost of capital.B. the actual sources of funding used for the project.C. an average of the firm’s overall cost of capital for the past five years.D. the current risk level of the overall firm.E. the risks associated with the use of the funds required by the project. the risks associated with the use of the funds required by the project.
The total direct costs of underwriting an equity IPO:A. tends to increase on a percentage basis as the proceeds of the IPO increase.B. is generally between 7 and 8 percent, regardless of the issue size.C. can be as high as 25 percent for small issues.D. excludes the gross spread.E. excludes both the gross spread and the underpricing cost. can be as high as 25 percent for small issues.
When a firm has flotation costs equal to 7 percent of the funding need, project analysts should:A. increase the project’s discount rate to offset these expenses by multiplying the firm’s WACC by 1.07.B. increase the project’s discount rate to offset these expenses by dividing the firm’s WACC by (1 – 0.07).C. add 7 percent to the firm’s WACC to get the discount rate for the project.D. increase the initial project cost by multiplying that cost by 1.07.E. increase the initial project cost by dividing that cost by (1 – 0.07). increase the initial project cost by dividing that cost by (1 – 0.07).
Direct business loans typically ranging from one to five years are called:A. private placements.B. debt SEOs.C. notes payable.D. debt IPOs.E. term loans. term loans.
Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excitement has an aftertax cost of capital of 11 percent. Both firms are considering building wilderness campgrounds complete with man-made lakes and hiking trails. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project?A. Wilderness Adventures onlyB. Travel Excitement onlyC. both Wilderness Adventures and Travel ExcitementD. neither Wilderness Adventures nor Travel ExcitementE. cannot be determined without further information neither Wilderness Adventures nor Travel Excitement
Incorporating flotation costs into the analysis of a project will:A. cause the project to be improperly evaluated.B. increase the net present value of the project.C. increase the project’s rate of return.D. increase the initial cash outflow of the project.E. have no effect on the present value of the project. increase the initial cash outflow of the project.
Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent: A. 3 months.B. 6 months.C. 180 daysD. 2 years.E. 5 years. 2 years.
Which one of the following statements is correct for a firm that uses debt in its capital structure?A. The WACC should decrease as the firm’s debt-equity ratio increases.B. When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred.C. The firm’s WACC will decrease as the corporate tax rate decreases.D. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.E. The WACC will remain constant unless a firm retires some of its debt. The WACC should decrease as the firm’s debt-equity ratio increases.
Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that 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 an offer called?A. best efforts offerB. firm commitment offerC. general cash offerD. rights offerE. priority offer rights offer
The flotation cost for a firm is computed as:A. the arithmetic average of the flotation costs of both debt and equity.B. the weighted average of the flotation costs associated with each form of financing.C. the geometric average of the flotation costs associated with each form of financing.D. one-half of the flotation cost of debt plus one-half of the flotation cost of equity.E. a weighted average based on the book values of the firm’s debt and equity. the weighted average of the flotation costs associated with each form of financing.
Which one of the following is a key goal of the aftermarket period?A. collection of largest number of Dutch auction bids as possibleB. best determination of a fair offer price for an upcoming IPOC. price support for a new issue of securitiesD. establishment of a broad-based underwriting syndicate for an upcoming IPOE. widest distribution of red herrings as possible price support for a new issue of securities
The cost of equity for a firm:A. tends to remain static for firms with increasing levels of risk.B. increases as the unsystematic risk of the firm increases.C. ignores the firm’s risks when that cost is based on the dividend growth model.D. equals the risk-free rate plus the market risk premium.E. equals the firm’s pretax weighted average cost of capital. ignores the firm’s risks when that cost is based on the dividend growth model.
The subjective approach to project analysis:A. is used only when a firm has an all-equity capital structure.B. uses the WACC of firm X as the basis for the discount rate for a project under consideration by firm Y.C. assigns discount rates to projects based on the discretion of the senior managers of a firm.D. allows managers to randomly adjust the discount rate assigned to a project once the project’s beta has been determined.E. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt. assigns discount rates to projects based on the discretion of the senior managers of a firm.
What is a seasoned equity offering?A. an offering of shares by shareholders for repurchase by the issuer. B. shares of stock that have been recommended for purchase by the SECC. equity securities held by a firm’s founder that are being offered for sale to the general publicD. sale of newly issued equity shares by a firm that is currently publicly ownedE. a set number of equity shares that are issued and offered to the public annually sale of newly issued equity shares by a firm that is currently publicly owned
Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called?A. green shoe fundingB. tombstone underwritingC. venture capitalD. red herring fundingE. life cycle capital venture capital
The date on which a shareholder is officially listed as the recipient of stock rights is called the:A. issue date.B. offer date.C. declaration date.D. holder-of-record date.E. ex-rights date. holder-of-record date.
Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm’s overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should:A. allocate more funds to Division A since it is the largest of the two divisions.B. fund all of Division B’s projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values.C. allocate the company’s funds to the projects with the highest net present values based on the firm’s weighted average cost of capital.D. assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.E. fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B. assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
When a firm announces an upcoming seasoned stock offering, the market price of the firm’s existing shares tends to:A. increase.B. decrease.C. remain constant.D. respond but the direction of the response is not predictable as shown by past studies.E. decrease momentarily and then immediately increase substantially within an hour following the announcement. decrease.
The value of a right depends upon:I. the number of rights required to purchase one new share.II. the market price of the security.III. the subscription price.IV. the price-earnings ratio of the stock. I, II, and III onlyI. the number of rights required to purchase one new share.II. the market price of the security.III. the subscription price.
Assigning discount rates to individual projects based on the risk level of each project:A. may cause the firm’s overall weighted average cost of capital to either increase or decrease over time.B. will prevent the firm’s overall cost of capital from changing over time.C. will cause the firm’s overall cost of capital to decrease over time.D. decreases the value of the firm over time.E. negates the firm’s goal of creating the most value for the shareholders. may cause the firm’s overall weighted average cost of capital to either increase or decrease over time.
Richard has an outstanding order with his stockbroker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading, IPO A opened at $31.50 a share and ended the day at $28.25 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $38.75 a share. What is Richard’s total profit or loss on these three IPOs as of the end of the first day of trading? A. -$75B. -$1,850C. -$1,500D. $2,250E. -$2,175 -$75
The Motor Plant wants to raise $28.6 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $25 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $29.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering?A. 2.27 rightsB. 2.52 rightsC. 1.55 rightsD. 2.68 rightsE. 1.67 rights 2.27 rights
Eastern Electric is offering 2,500 shares of stock in a Dutch auction. The bids include: 600 shares at $27 a share, 1,500 shares at $26, 3,000 shares at $25, and 2,500 shares at $24 a share.How much cash will Eastern Electric receive from selling these shares? Ignore all transaction and flotation costs.A. $67,500B. $65,200C. $60,000 D. $62,500E. $63,000 $62,500
The Boat Works has decided to take the company public by offering a total of 150,000 shares of common stock to the public. The firm has hired an underwriter who arranges a firm commitment underwriting and suggests an initial selling price of $22 a share with a spread of 8 percent. As it turns out, the underwriters only sell 122,400 shares. How much cash will the firm receive from its first public offering? A. $2,727,200B. $3,074,400 C. $3,036,000D. $2,692,800E. $2,477,376 $3,036,000
Kurt currently owns 4.6 percent of Northeastern Transportation. The company has a total of 465,000 shares outstanding with a current market price of $26.20 a share. At present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?A. 4.26 percent B. 4.37 percentC. 4.51 percentD. 4.60 percentE. 4.46 percent 4.37 percent
Over-the-Road Trucking is considering investing in a new project that will cost $6.8 million and increase net income by 9.2 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.34 million shares of stock outstanding with a market price of $39 per share. The current earnings per share are $2.34. What will the earnings per share be if the project is implemented?A. $2.34B. $2.30 C. $2.26D. $2.23E. $2.19 $2.26
You currently own 12 percent of the 2.8 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $23 a share. One right will be issued for each share of outstanding stock. This offering will provided $4.6 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally?A. 11.2 percentB. 10.6 percentC. 11.5 percentD. 12.0 percentE. 10.8 percent 11.2 percent
Flagler, Inc. needs to raise $14.7 million to finance its expansion. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $26 per share and the company’s underwriters charge a spread of 8.5 percent. How many shares need to be sold? (Round up the next whole share.)A. 617,907 sharesB. 824,011 sharesC. 666,667 sharesD. 500,000 sharesE. 738,409 shares 617,907 shares
The Timken Company has announced a rights offer to raise $18 million for a new journal. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently sells for $49 per share and there are 1.52 million shares outstanding. The subscription price is set at $45 per share. What is the ex-rights price per share?A. $45.58 B. $48.17C. $47.09D. $48.80E. $49.42 $48.17
New Education needs to raise $16 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. Suppose the offer price is $36 per share and the company’s underwriters charge a spread of 8.4 percent. The SEC filing fee and associated administrative expenses of the offering are $489,000. How many shares need to be sold?A. 448,907B. 461,222C. 511,111D. 529,937 E. 500,030 500,030

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