Question 1

Which of the following is false?

Accepted Answer

A)   Public corporations have a board of directors; private corporations do not.
B)   Private corporations are exempt from SEC filings.
C)   Public corporations typically have many more shareholders that are not involved in running the corporation.
D)   Private corporations are generally smaller than public corporations.

Question 2

A stock is traded rights on; the market price per share of the common stock is $100; the subscription price is $80; and the number of rights needed to buy a new share is 19. Calculate the approximate value of a right.

Accepted Answer

A)   $1.00
B)   $1.05
C)   $3.00
D)   $2.00

Question 3

A signal that is likely to be inferred by the market when new common stock is issued is:

Accepted Answer

A)   prospects of the firm are better than generally believed.
B)   prospects of the firm are worse than generally believed.
C)   the firm is preparing for a new debt issue.
D)   new management or directors of the board are being put in place.

Question 4

A right is no longer valuable after:

Accepted Answer

A)   the ex rights date.
B)   the expiration date.
C)   the rights on date.
D)   the purchase date.

Question 5

The exercise value of a warrant is:

Accepted Answer

A)   the amount saved by purchasing the common stock by exercising the warrant rather than selling the common stock directly to investment bankers.
B)   the amount saved by purchasing the common stock by exercising the warrant rather than buying the common stock in the open market.
C)   the amount saved by purchasing the common stock by selling the warrant rather than selling the common stock directly in the open market.
D)   the amount saved by purchasing the common stock by exercising the warrant rather than selling the common stock in the open market.

Question 6

Which of the following statements is true?

Accepted Answer

A)   The optimal capital structure can be determined using a complicated formula and managerial expertise.
B)   Leveraged buyouts decrease bondholder (creditor)  risk.
C)   The interest payment tax shield lowers the cost of debt.
D)   The risk on debt for investors is higher than the risk on equity.

Question 7

The current market price of a rights-on stock is $90.00. The subscription price is $81.00. The number of rights required to purchase one new share is 8. What is the approximate market price is one right?

Accepted Answer

A)   $1.00
B)   $0.88
C)   $1.25
D)   $1.13

Question 8

If variable costs = $10.00 per unit; and the selling price = $13.00 per unit, and the break-even point in units = 100,000, calculate the fixed costs.

Accepted Answer

A)   $4,348
B)   $50,000
C)   $300,000
D)   $33,333

Question 9

Explain how a firm can establish its optimal capital structure.

Accepted Answer

Financial managers seek the capital stru...

Question 10

The holder of a call option:

Accepted Answer

A)   has the right to sell shares at a predetermined price on or before the expiry date.
B)   agrees to buy shares at a predetermined price on or before the expiry date
C)   agrees to sell shares at a predetermined price on or before the expiry date.
D)   has the right to buy shares at a predetermined price on or before the expiry date.

Question 11

Why would an investor use put options to protect the value of a shareholding they currently own?

Accepted Answer

If a shareholder has a holding they woul...

Question 12

Describe the difference between a preemptive right and a warrant.

Accepted Answer

A preemptive right gives the holder the ...

Question 13

The call price will exceed the par value by an amount called:

Accepted Answer

A)   the percentage of price.
B)   the redemption price.
C)   the call premium.
D)   the call discount.

Question 14

Calculate DFL.

Accepted Answer

A)   1.00
B)   1.67
C)   1.12
D)   1.05

Question 15

A firm has a rights offering with a record date of Thursday, April 24, and and expiration date of Friday, May 31. You buy the stock on Friday April 25. You will be able to exercise the rights:

Accepted Answer

A)   Friday, May 31.
B)   Any day before May 31.
C)   It depends on the exercise price.
D)   You will not own the rights.

Question 16

With respect to preferred stock, if a dividend is missed and must be paid at a later date before Common Share dividends are paid, it is:

Accepted Answer

A)   a fixed payment preferred stock.
B)   a cumulative preferred stock.
C)   a rarely used feature.
D)   a continuous preferred stock.

Question 17

As a firm moves to a capital structure with higher debt:

Accepted Answer

A)   financial risk of the firm decreases if interest payments are tax deductible.
B)   financial risk of the firm is unaffected if interest payments are tax deductible.
C)   financial risk of the firm increases.
D)   DOL increases.

Question 18

If Firm A has a greater variability in operating earnings than Firm B , which firm has the lower DOL?

Accepted Answer

A)   Firm X
B)   Firm Y
C)   DOL is equal for both.
D)   There is no way to tell from the information given.

Question 19

The text states that a company may chose to use the call provision and refund a bond issue even if the refunding does not have a positive net present value. What is the most likely reason this would happen. Be specific.

Accepted Answer

The bond indenture on the current issue ...

Question 20

A stock is trading ex-rights; the market price per share of common stock is $75; the number of rights needed to buy one new share is 3, and the value of a right is 5. Calculate the subscription price.

Accepted Answer

A)   70
B)   65
C)   80
D)   60

Exam 5: Long-Term Financing Decisions

The call price will exceed the par value by an amount called:

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Why would an investor use put options to protect the value of a shareholding they currently own?

Correct AnswerverifiedIf a shareholder has a holding they woul...View AnswerShow Answer

Calculate DFL.

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The text states that a company may chose to use the call provision and refund a bond issue even if the refunding does not have a positive net present value. What is the most likely reason this would happen. Be specific.

Correct AnswerverifiedThe bond indenture on the current issue ...View AnswerShow Answer

As a firm moves to a capital structure with higher debt:

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If variable costs = $10.00 per unit; and the selling price = $13.00 per unit, and the break-even point in units = 100,000, calculate the fixed costs.

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A stock is traded rights on; the market price per share of the common stock is $100; the subscription price is $80; and the number of rights needed to buy a new share is 19. Calculate the approximate value of a right.

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A right is no longer valuable after:

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If Firm A has a greater variability in operating earnings than Firm B , which firm has the lower DOL?

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Describe the difference between a preemptive right and a warrant.

Correct AnswerverifiedA preemptive right gives the holder the ...View AnswerShow Answer

A stock is trading ex-rights; the market price per share of common stock is $75; the number of rights needed to buy one new share is 3, and the value of a right is 5. Calculate the subscription price.

Correct AnswerverifiedShow Answer

The holder of a call option:

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The current market price of a rights-on stock is $90.00. The subscription price is $81.00. The number of rights required to purchase one new share is 8. What is the approximate market price is one right?

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With respect to preferred stock, if a dividend is missed and must be paid at a later date before Common Share dividends are paid, it is:

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The exercise value of a warrant is:

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Which of the following is false?

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A signal that is likely to be inferred by the market when new common stock is issued is:

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A firm has a rights offering with a record date of Thursday, April 24, and and expiration date of Friday, May 31. You buy the stock on Friday April 25. You will be able to exercise the rights:

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Which of the following statements is true?

Correct AnswerverifiedShow Answer

Explain how a firm can establish its optimal capital structure.

Correct AnswerverifiedFinancial managers seek the capital stru...View AnswerShow Answer

Correct Answer
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If a shareholder has a holding they woul...
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The bond indenture on the current issue ...
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A preemptive right gives the holder the ...
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Correct Answer
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Correct Answer
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Financial managers seek the capital stru...
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