FN6350 Quiz 4

Question 1

Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital markets?

   

A) All investors hold the efficient portfolio of assets.

 

 

B) There are no taxes, transaction costs, or issuance costs associated with security trading.

 

 

C) A firm's financing decisions do not change the cash flows generated by its investments, nor do they reveal new information about them.

 

 

D) Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows.

 

Question 2

Equity in a firm with no debt is called:

 

A) riskless equity.

 

 

B) risky equity.

 

 

C) levered equity.

 

   

D) unlevered equity.

 

Question 3

Which of the following industries is likely to have the lowest costs of financial distress?

   

A) Electric utilities

 

 

B) Computer software

 

 

C) Airlines

 

 

D) Biotechnology

 

Question 4

In an agency problem known as debt overhang, if the company has risky debt outstanding, equity holders will choose to invest only if:

 

A) the debt holders will lose all their money.

 

 

B) the NPV of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio.

 

   

C) the profitability index of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio.

 

 

D) the NPV of the project is negative.

 

Question 5

Which of the following is one unintended consequence of the federal bailouts in response to the 2008 financial crisis?

 

A) Bondholders will charge equity holders for the risk of this abuse.

 

   

B) Lenders to corporations considered "too big to fail" may presume they have an implicit government guarantee, thus lowering their incentives to insist on strong covenants.

 

 

C) Equity holders will credibly commit not to take excessive risk by agreeing to very strong bond covenants.

 

 

D) Managers who earned large bonuses when their businesses did well did not need to repay those bonuses later when things turned sour.

 

Question 6

Which of the following is unlikely to influence a firm's choice of capital structure?

 

A) All of the above influence capital structure decisions.

 

 

B) Taxes

 

 

C) Agency costs and benefits of leverage

 

   

D) Transaction costs

 

Question 7

A firm can repurchase shares through a(n) ________ in which it offers to buy shares at a prespecified price during a short time period-generally within 20 days.

 

A) targeted repurchase

 

 

B) open market share repurchases

 

   

C) tender offer

 

 

D) Dutch auction share repurchase

 

Question 8

A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

 

A) open market share repurchases

 

   

B) targeted repurchase

 

 

C) Dutch auction share repurchase

 

 

D) tender offer

 

Question 9

Which of the following statements is FALSE?

 

A) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.

 

   

B) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.

 

 

C) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.

 

 

D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

 

Question 10

Which of the following statements is FALSE?

A) Differences in tax preferences create clientele effects, in which the dividend policy of a firm is optimized for the tax preference of its investor clientele.

 

B) The dividend-capture theory states that absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend.

 

  C) Individuals in the highest tax brackets have a preference for stocks that pay high dividends, whereas tax-free investors and corporations have a preference for stocks with no or low dividends.

 

D) To compare investor preferences, we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor.

 

 

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Status NEW Posted 01 Aug 2017 04:08 PM My Price 10.00

FN6-----------350----------- Qu-----------iz -----------4-----------

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