corporate finance TEST QUESTIONS | ACCURATE QUESTIONS AND DETAILED ANSWERS | GUARANTEED, Exams of Finance

Download corporate finance TEST QUESTIONS | ACCURATE QUESTIONS AND DETAILED ANSWERS | GUARANTEED and more Exams Finance in PDF only on Docsity! corporate finance TEST QUESTIONS | ACCURATE QUESTIONS AND DETAILED ANSWERS | GUARANTEED PASS | GRADED A | LATEST UPDATE 2024-2025 WITH 100+ QUESTIONS The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the value) is called: A. winner's curse. B. seniority. C. English auction. D. uniform-price auction. - CORRECT ANS-A. winner's curse In a uniform-price auction: A. all winning bidders pay the price that they bid. B. all winning bidders pay a price that is the highest bid. C. all winning bidders pay a price that is the lowest winning bid. D. all winning bidders receive their full allocation. - CORRECT ANS-C. all winning bidders pay a price that is the lowest winning bid Suppose that a government wishes to auction 5 million bonds (quantity), and three potential buyers submit the following bids: Buyer A: Price $1,015 Quantity 2M Buyer B: Price $1,000 Quantity 3M Buyer C: Pricy $990 Quantity 1M In a discriminatory auction: A. Buyer A pays $1,015 and Buyer B pays $1,000. B. Buyer A pays $1,000 and Buyer B pays $1,000. C. Buyer A pays $990 and Buyer B pays $990. D. Buyer A pays $1,000 and Buyer C Pays $990. - CORRECT ANS-A. Buyer A pays $1,015 and Buyer B pays $1,000 Suppose a government wishes to auction 5 million bonds, and three would-be buyers submit the following bids: Buyer A: Price $1,015 Quantity 2M D. Registration of the sale of securities in the primary market. - CORRECT ANS-C. the provision that allows large companies to file a single registration statement covering financing plans up to three years into the future Shelf registration is more often used for the: A. issue of common stock. B. issue of convertible securities. C. issue of corporate bonds. D. issue of warrants. - CORRECT ANS-C. issue of corporate bonds The following are advantages of shelf registration except: I) securities can be issued in dribs and drabs without incurring excessive transaction costs; II) securities can be issued on short notice; III) security issues can be timed to take advantage of market conditions A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-D. I, II, and III The underwriter's spread is the highest for: A. IPOs. B. seasoned equity offerings. C. convertible bonds. D. straight bonds. - CORRECT ANS-A. IPOs The very first public equity sold by a company is referred to as: A. a rights issue. B. American depositing receipts (ADRs). C. an initial public offering (IPO). D. a seasoned equity offering (SEO). - CORRECT ANS-C. an initial public offering (IPO) Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds? A. initial public offerings (IPOs) B. seasoned equity offerings (SEOs) C. convertible bonds D. straight bonds - CORRECT ANS-D. straight bonds Most financial economists attribute the drop in the price of equity subsequent to the announcement of a new issue to: A. an increase in the supply of shares. B. information effect. C. both a and b. D. neither a nor b. - CORRECT ANS-B. information effect A rights issue is also called a(an): Which of the following is a possible exception to the efficient-market theory? A. Underwriters charge investors more for IPO shares than they pay the issuing firms. B. IPO spreads are lower on larger issues. C. The issuance of equity is interpreted as an unfavorable signal by investors. D. The long-run returns of IPOs tend to underperform the market. - CORRECT ANS-D. the long- run returns of IPOs tend to underperform the market The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price (North American rights offering) of $27/share, calculate the value of a right. A. $1/right B. $2/right C. $3/right D. $4/right - CORRECT ANS-A. $1/right Number of new shares = 13,500,000/27 = 500,000 shares; Stock price after issue = ($30M + 13.5M)/1.5M = $29; Number of rights required to buy a new share = 1,000,000/500,000 = 2 rights; Value of a right = (29 - 27)/(2) = $1/right. When a company sells an entire issue of securities to a small group of institutional investors like like insurance companies, pension funds, etc., it is called a(an): A. rights offering. B. general art offering. C. private placement. D. unseasoned issue. - CORRECT ANS-C. private placement SEC registration is not required when a company makes a: A. private placement of securities. B. public offering of securities issue having a value less than $5 million and a maturity less than nine months. C. public offering of securities having a value greater than $5 million. D. both A and B. - CORRECT ANS-D. both A and B 46. The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called: A. Rule 144A. B. Rule 415. C. the Sarbanes-Oxley Act. D. none of the options. - CORRECT ANS-A. Rule 144A What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue? A. SOX compliance B. spinning C. conflict of interest D. Chinese wall - CORRECT ANS-C. conflict of interest What costs in an IPO generally exceed all other costs? A. commissions B. issues fees C. spreads III) stock dividend; IV) liquidating dividend A. I only B. II only C. III only D. I, II, and IV only - CORRECT ANS-C. III only Firms can repurchase shares in the following ways: I) open market repurchase; II) tender offer; III) Dutch auction; IV) direct negotiation with a major shareholder A. I only B. II only C. III only D. I, II, III, and IV - CORRECT ANS-D. I, II, III, and IV A Dutch auction is the same as a(an): A. discriminatory price auction. B. uniform price auction. C. English auction. D. share repurchase. - CORRECT ANS-B. uniform price auction The par value of the outstanding shares is known as: A. retained earnings. B. legal capital. C. book value of equity. D. additional paid-in capital. - CORRECT ANS-B. legal capital Consider the procedure whereby the firm states a series of prices at which it is prepared to repurchase stock. Shareholders then submit offers indicting how many shares they wish to sell and at which price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as a(n): A. open market repurchase. B. Dutch auction. C. green mail. D. tender offer. - CORRECT ANS-B. Dutch auction What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend? A. Lower income taxes, if capital gains tax rates are less than dividend tax rates B. Higher income taxes, if capital gains tax rates are less than dividend tax rates C. Lower share price D. A tax-free transaction - CORRECT ANS-A. lower income taxes, if capital gains tax rates are less than dividend tax rates Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off? A. Increase dividends. B. Reduce share repurchases. C. Announce that dividends will not change for at least three years. D. We are reluctant to make a change that may have to be reversed. - CORRECT ANS-A. we try to avoid reducing the dividend Generally, investors interpret the announcement of an increase in dividends as: A. bad news and the stock price drops. B. good news and the stock price increases. C. a nonevent and does not affect the stock price. D. very bad news and the stock price plunges. - CORRECT ANS-B. good news and the stock price increases Generally, investors interpret the announcement of a decrease in dividends as: A. bad news and the stock price drops. B. good news and the stock price increases. C. a nonevent and does not affect the stock prices. D. very good news and the stock price jumps up. - CORRECT ANS-A. bad news and the stock price drops Generally, investors view the announcement of an open-market repurchase program as: A. bad news and the stock price drops. B. good news and the stock price increases. C. a nonevent and does not affect the stock price. D. very bad news and the stock price plunges. - CORRECT ANS-B. good news and the stock price increases A key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that: A. future stock prices are certain. B. firms have an adequate supply of Treasury shares. C. there exists a risk-free asset. D. new shares are sold at a fair price. - CORRECT ANS-D. new shares are sold at a fair price Miller and Modigliani's indifference proposition regarding dividend policy: A. assumes that tax rates increase at the same rate as inflation. B. assumes that investors can sell their stock at a fair price. C. states that investors are indifferent between stock dividends and cash dividends. D. states that investors are indifferent between stock repurchases and cash dividends. - CORRECT ANS-B. assumed that investors can sell their stock at a fair price The following are indicators that the firm has a cash surplus: I) Free cash flow is reliably positive. II) The firm has a low debt ratio compared to similar firms. III) The firm has sufficient debt capacity to cover unexpected opportunities or setbacks. A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-D. I, II, and III The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy: A. Changes in investment policy will alter dividend policy. C. good management, regardless of dividend yield. D. a zero payout policy. - CORRECT ANS-A. a high dividend yield According to behavioral finance, investors prefer dividends because: A. investors prefer the discipline that comes from spending only the dividends. B. dividends generate lower taxes. C. the stock market is efficient. D. dividends provide a tax deduction. - CORRECT ANS-A. investors prefer the discipline that comes from spending only the dividends If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date? A. Fall by more than the amount of the dividend B. Fall exactly by the amount of the dividend C. Fall by less than the amount of the dividend D. Cannot be predicted - CORRECT ANS-C. fall by less than the amount of the dividend (Relative demand for the stock will increase on the ex-dividend date since the stock no longer trades with the dividend attached. So the stock price will fall due to the dividend, but will increase to some extent due to its ex-dividend status. On net, it will fall less than the amount of the dividend) Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because: A. capital gains are actually taxed, while dividends are taxed on paper only. B. dividends are taxed when distributed, while capital gains are deferred until the stock is sold. C. both dividends and capital gains are taxed every year. D. both A and C. - CORRECT ANS-B. dividends are taxed when distributed, while capital gains are deferred until the stock is sold Consider the payout policies of U.S. firms from 2001-2010. Which category had the highest percentage of firms? A. Firms that paid dividends and repurchased shares B. Firms that paid dividends but did not repurchase shares C. Firms that paid no dividends but did repurchase shares D. Firms that paid no dividends and did not repurchase shares - CORRECT ANS-D. firms that paid no dividends and did not repurchase shares Which of the following investors has the strongest tax reason to prefer dividends over capital gains? A. pension funds B. financial institutions C. individuals D. corporations - CORRECT ANS-D. corporations If the corporate tax rate is 35%, what is the maximum effective tax rate on dividends received by another corporation? A. 35% B. 30% C. 10.5% D. 65% - CORRECT ANS-C. 10.5% 70% of dividends received by another corporation is tax-exempt. Tax rate = (0.3) × (0.35) = 0.105 = 10.5%. When a firm has no debt, then such a firm is known as: I) an unlevered firm; II) a levered firm; III) an all-equity firm A. I only B. II only C. III only D. I and III only - CORRECT ANS-D. I and III only The capital structure of the firm can be defined as: I) the firm's mix of different debt securities; II) the firm's mix of different securities used to finance assets; III) the market imperfection that the firm's managers can exploit A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-B. II only The total market value (V) of the securities of a firm that has both debt (D) and equity (E) is: A. V = D - E B. V = E - D C. V = D × E D. V = D + E - CORRECT ANS-D. V = D + E If a firm is financed with both debt and equity, the firm's equity is known as: A. unlevered equity. B. levered equity. C. preferred equity. D. none of the options. - CORRECT ANS-B. levered equity Under what conditions would a policy of maximizing the value of the firm not be the same as a policy of maximizing shareholders' wealth? A. If the issue of debt increases the financial risk of the firm's equity B. If the firm issues debt for the first time C. If the beta of equity is positive D. If an issue of debt affects the market value of existing debt - CORRECT ANS-D. if an issue of debt affects the market value of existing debt A policy of maximizing the value of the firm is the same as a policy of minimizing the weighted average cost of capital providing that: I) the firm's investment policy is settled; II) there are no taxes; III) an issue of new debt does not affect the market value of existing debt A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-D. I, II, and III