MBA 702 - Financial Management Test 3 Study Guide
A $.45 quarterly cash payment paid by Jones & Co, to its shareholders in the normal course of business becomes a
liability of the company on the: - ANS -declaration date
\A company's current cost of capital is based on: - ANS -both the returns currently required by its debtholders and
stockholders.
\A company's weighted average cost of capital: - ANS -is the return investors require on the total assets of the firm
\A firm should select the capital structure that: - ANS -maximizes the value of the firm
\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? - ANS -Cost of equity
\A stock repurchase program - ANS -is essentially the same as a cash dividend program provided there are no taxes or
other costs
\A syndicate can be best defined as a: - ANS -group of underwriters sharing the risk of selling a new issue of securities.
\Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment
banks handling the offering, are called: - ANS -tombstones
\Alberto 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 an offer called? - ANS -Rights offer
\All else constant, which one of the following will increase a company's cost of equity if the company computes that cost
using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta
of 1.2. - ANS -A reduction in the risk-free rate
\All of the following are supporting arguments in favor of IPO underpricing except which one? - ANS -Provides better
returns to issuing firms
\Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model (CAPM) to determine its cost of
equity. As a result, the company's cost of equity: - ANS -is dependent upon a reliable estimate of the market risk premium
\Assume you are reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT).
The steeper the slope of the plotted line the: - ANS -greater the sensitivity of EPS to changes in EBIT
, \Bailey'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? - ANS -Thursday, March 20
\Before 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. Which one of the
following terms best describes this situation? - ANS -Percentage ownership dilution
\Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a
fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best
describes this underwriting? - ANS -Dutch auction
\Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is
serving as a(n): - ANS -underwriter
\Existing shareholders: - ANS -may or may not have a pre-emptive right to newly issued shares.
\Financial risk is: - ANS -dependent upon a company's capital structure.
\HJ Corporation has excess cash and has opted to buy some of its shares of outstanding common stock. What is this
process of buying called? - ANS -Stock repurchase
\If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to: - ANS
-increase the average risk level of the company over time
\Jones & Co. recently went public an received $23.07 a share of their entire offer of 30,000 shares. Keeser & Co. served
as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was
this? - ANS -Firm commitment
\Kate 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? - ANS -Kate is entitled to the dividend but Ted is not
\M&M Proposition I with tax implies that the: - ANS -weighted average cost of capital decreases as the debt-equity ratio
increases
\Mobile Unites 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 shared were purchased in accordance with which one of the
following? - ANS -Green Shoe provision
A $.45 quarterly cash payment paid by Jones & Co, to its shareholders in the normal course of business becomes a
liability of the company on the: - ANS -declaration date
\A company's current cost of capital is based on: - ANS -both the returns currently required by its debtholders and
stockholders.
\A company's weighted average cost of capital: - ANS -is the return investors require on the total assets of the firm
\A firm should select the capital structure that: - ANS -maximizes the value of the firm
\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? - ANS -Cost of equity
\A stock repurchase program - ANS -is essentially the same as a cash dividend program provided there are no taxes or
other costs
\A syndicate can be best defined as a: - ANS -group of underwriters sharing the risk of selling a new issue of securities.
\Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment
banks handling the offering, are called: - ANS -tombstones
\Alberto 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 an offer called? - ANS -Rights offer
\All else constant, which one of the following will increase a company's cost of equity if the company computes that cost
using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta
of 1.2. - ANS -A reduction in the risk-free rate
\All of the following are supporting arguments in favor of IPO underpricing except which one? - ANS -Provides better
returns to issuing firms
\Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model (CAPM) to determine its cost of
equity. As a result, the company's cost of equity: - ANS -is dependent upon a reliable estimate of the market risk premium
\Assume you are reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT).
The steeper the slope of the plotted line the: - ANS -greater the sensitivity of EPS to changes in EBIT
, \Bailey'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? - ANS -Thursday, March 20
\Before 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. Which one of the
following terms best describes this situation? - ANS -Percentage ownership dilution
\Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a
fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best
describes this underwriting? - ANS -Dutch auction
\Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is
serving as a(n): - ANS -underwriter
\Existing shareholders: - ANS -may or may not have a pre-emptive right to newly issued shares.
\Financial risk is: - ANS -dependent upon a company's capital structure.
\HJ Corporation has excess cash and has opted to buy some of its shares of outstanding common stock. What is this
process of buying called? - ANS -Stock repurchase
\If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to: - ANS
-increase the average risk level of the company over time
\Jones & Co. recently went public an received $23.07 a share of their entire offer of 30,000 shares. Keeser & Co. served
as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was
this? - ANS -Firm commitment
\Kate 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? - ANS -Kate is entitled to the dividend but Ted is not
\M&M Proposition I with tax implies that the: - ANS -weighted average cost of capital decreases as the debt-equity ratio
increases
\Mobile Unites 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 shared were purchased in accordance with which one of the
following? - ANS -Green Shoe provision
