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1. Alicia, who is a divisional manager, complains...

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1. Alicia, who is a divisional manager, complains bitterly that her division's required return for its projects is one percent higher than the return required for any other division of the firm. Management's knowledge of which of the following most likely contribute to the higher rate requirement for Alicia's division? I. Alicia tends to overestimate the projected cash inflows on her projects. II. Alicia tends to underestimate the variable costs of her projects. III. Alicia's division is the most efficiently managed division in the firm. IV. Alicia's division presents greater risk to the firm than any of the other divisions. A. IV only B. I and II only C. III and IV only D. I, II, and IV only E. I, II, III, and IV 2. Miller Industrial Tools has two separate divisions. Division X produces custom work on a pre-paid basis only for long-term customers and therefore, is subject to less risk than division Y. The company has assigned a discount rate equal to the firm's WACC minus 1.5 percent to division X and a rate equal to the firm's WACC plus 2 percent to division Y. The company has a debt-equity ratio of .40 and a tax rate of 32 percent. The cost of equity is 11.4 percent and the aftertax cost of debt is 4.8 percent. Presently, each division is considering a new project. Division Y's project provides a 10.2 percent rate of return and division X's project provides a 6.4 percent return. Which projects, if any, should the company accept? A. accept both X and Y B. accept X and reject Y C. reject X and accept Y D. reject both X and Y E. The answer cannot be determined without additional information. 3. Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)? A. The WACC can be used as the required return for all new projects. B. The WACC of a leveraged firm will decrease when the tax rate decreases. C. An increase in the market risk premium will tend to decrease a firm's WACC. D. The WACC is a starting point for the subjective approach to setting discount rates. E. A reduction in the risk level of a firm will tend to increase the firm's WACC. 4. If the risk-free rate of return decreases while the market rate of return remains constant, then the: A. slope of the security market line will decrease. B. slope of the security market line will increase. C. the beta of the market must increase. D. the vertical intercept of the security market line must increase. E. the market risk premium as measured on the vertical axis must decrease. 5. The New Look is a retail outlet selling the latest fashions to the general public through its outlets located in various neighborhood malls. The Textile Outlet is a clothing wholesaler that primarily buys from textile mills and sells to retail outlets. The New Look has a cost of capital of 12 percent, while the Textile Outlet's cost of capital is 10.75 percent. Both firms are considering opening a retail outlet in a gigantic new mall that is being built to service the greater Atlanta area. Both proposals are quite similar in design and have basically the following financial features: an initial cash outlay of $3.2 million, a projected 5-year life with no salvage value, and cash inflows of $875,000 a year for the life of the project. Which firm or firms, if either, should open a retail outlet in the new mall? A. Only the New Look should open in the new mall. B. Only the Textile Outlet should open in the new mall. C. Neither the New Look nor the Textile Outlet should open in the new mall. D. Both the New Look and the Textile Outlet should open a store in the new mall. E. The answer cannot be determined without additional information. 6. Hopewell Enterprises is a globally diverse conglomerate with interests in diverse retail, medical, and technology sectors. The firm has a beta of 1.4 and a cost of capital of 13.8 percent. Medical Associates is a specialty firm in the medical equipment field and has a beta of 1.6 and a cost of capital of 15.7 percent. With the aging of America, both firms recognize the opportunities that exist in the medical field and are considering expansion in this area. At present, there is an opportunity for multiple firms to be involved in a new medical devices project. The project will require an investment from each investor of $6.8 million. The project is expected to return $11.5 million to each investor in one lump sum payment at the end of year 4. Which firm or firms, if either, should accept this project? A. Only Hopewell Enterprises should accept this investment. B. Only Medical Associates should accept this investment. C. Both firms should reject this investment. D. Both firms should accept this investment. E. The answer cannot be determined without additional information. 7. Which of the following statements related to preferred stock are correct? I. A decrease in the market value of preferred stock will increase a firm's weighted average cost of capital. II. Preferred stock pays a constant dividend. III. Preferred stock is generally the cheapest source of capital for a firm. IV. An increase in the rating of a preferred stock will increase the cost of preferred. A. I and III only B. II and IV only C. I and II only D. III and IV only E. I, II, and III only 8. Sabrina's just paid an annual dividend of $1.79 per share. This dividend is expected to increase by 2.5 percent annually. Currently, the firm has a beta of .87 and a stock price of $31 a share. The risk-free rate is 4.5 percent and the market rate of return is 11.8 percent. What is the cost of equity capital for Sabrina's? A. 8.27 percent B. 8.43 percent C. 9.63 percent D. 10.86 percent E. 11.07 percent 9. Which one of the following is a correct statement? A. Current tax laws favor debt financing. B. A decrease in the dividend growth rate increases the cost of equity. C. An increase in the systematic risk of a firm will decrease the firm's cost of capital. D. A decrease in a firm's debt-equity ratio will usually decrease the firm's cost of capital. E. The cost of preferred stock decreases when the tax rate increases. 10. The Rhodes Co. is considering a project with an initial cost of $5.8 million. The project will produce cash inflows of $1.64 million a year for five years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is -1.5 percent. The firm has a pre-tax cost of debt of 7.9 percent and a cost of equity of 11.8 percent. The debt-equity ratio is .60 and the tax rate is 34 percent. What is the net present value of the project? A. $672,403 B. $717,219 C. $777,445 D. $821,212 E. $854,008 11. Watertown Antiques has a pre-tax cost of debt of 8.7 percent and a cost of equity of 13.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of 1.5 percent. The firm's tax rate is 35 percent and its debt-equity ratio is .6. The project has an initial cost of $5.2 million and produces cash inflows of $1.48 million a year for 5 years. What is the net present value of the project? A. -$178,016 B. -$16,323 C. $128,407 D. $143,909 E. $152,212 12. Kathy's Quilts is a brick-and-mortar quilt and fabric retailer. The firm is considering expanding its operations to include Internet sales. Which one of the following would be the best firm to use in a pure play approach to this project? A. a national fabric store with both in-store and online sales B. a sewing machine manufacturer that sells only online C. a fabric store that sells primarily online D. an online wholesaler of crafts items E. Kathy's Quilts 13. Hybrid Motors has paid increasing dividends of $.42, $.50, $.55, $.65, and $.80 a share over the past five years, respectively. The firm estimates that future increases in its dividends will be comparable to the arithmetic average growth rate over these past five years. The stock is currently selling for $41.50 a share. The risk-free rate is 3.5 percent and the market risk premium is 8.6 percent. What is the cost of equity for Hybrid Motors if the firm's beta is 1.42? A. 12.49 percent B. 15.45 percent C. 17.78 percent D. 18.67 percent E. 19.24 percent 14. Which of the following will affect the capital structure weights of a firm? I. decrease in the book value of a firm's equity II. decrease in a firm's tax rate III. increase in the market value of the firm's common stock IV. increase in the firm's debt-equity ratio A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV 15. C&O, Inc. is considering a project that requires an initial cash outlay for equipment of $41.4 million. The equipment will be depreciated to a zero book value over the 4-year life of the project. At the end of the project, C&O expects to sell the equipment for $29.9 million. The project will produce cash inflows of $12.6 million a year for the first 2 years and $5.8 million a year for the following 2 years. C&O has a cost of equity of 14 percent and a pre-tax cost of debt of 9 percent. The debt-equity ratio is .60 and the tax rate is 38 percent. The company has decided that it will accept the project if the project's internal rate of return (IRR) exceeds the firm's weighted average cost of capital (WACC) by 1.5 percent or more. Should C&O accept this project and why or why not? A. accept; because the IRR is less than the required rate B. accept; because the IRR exceeds the required rate C. accept; because the IRR equals the required rate D. reject; because the IRR is less than the required rate E. reject; because the IRR exceeds the required rate 16. Temple Manufacturing has three divisions. Division A has been in existence the longest and has the most stable sales. Division B has been in existence for ten years and is slightly less risky than the overall firm. Division C is the research and development side of the business. When allocating funds, the firm should probably: A. require the highest rate of return from division A since it is the most stable. B. assign the highest cost of capital to division C because it is most likely the riskiest of the three divisions. C. allocate the least amount of funds to division C since it is involved only with research and development. D. use the firm's WACC as the cost of capital for divisions A and B. E. allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm. 17. A firm wants to create a weighted average cost of capital (WACC) of 9.5 percent. The firm's cost of equity is 11 percent and its pre-tax cost of debt is 9 percent. The tax rate is 35 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC? A. .28 B. .37 C. .41 D. .54 E. .59 18. Baker's Footwear has 8,000 shares of common stock outstanding at a price per share of $64 and a rate of return of 15 percent. The firm has 2,000 shares of 6 percent preferred stock outstanding at a price of $54 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $100,000 and a market price equal to 102 percent of face value. The yield-to-maturity on the debt is 9.36 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent? A. 12.34 percent B. 12.41percent C. 12.88 percent D. 13.16 percent E. 13.32 percent 19. Ziegler's Supply has a beta of 1.06, a variance of .0124, a dividend growth rate of 2.8 percent, a stock price of $27 a share, and an expected annual dividend of $1.10 per share next year. The market rate of return is 10.8 percent and the risk-free rate is 4.1 percent. What is the cost of equity for Ziegler's Supply? A. 6.89 percent B. 7.87 percent C. 8.48 percent D. 9.04 percent E. 11.19 percent 20. Which one of the following statements is correct concerning capital structure weights? A. Capital structure weights are constant over time. B. A new bond issue will not affect the weight of the firm's preferred stock. C. An increase in the debt-equity ratio will increase the weight of the common stock. D. The repurchase of preferred stock will not affect the weight of the debt. E. The issuance of additional shares of common stock will decrease the weight of the preferred stock. 21. You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $1.5 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $230,000. Given this, you know that leverage is beneficial to the firm: A. whenever EBIT is less than $230,000. B. only when EBIT is $230,000. C. whenever EBIT exceeds $230,000. D. only if the debt is decreased by $230,000 to a total of $1.27 million. E. only if the debt is increased by $230,000 to a total of $1.73 million. 22. Webster's is an all-equity firm that has 20,000 shares of stock outstanding at a market price of $45 a share. The firm has earnings before interest and taxes of $60,000 and has a 100 percent dividend payout ratio. Ignore taxes. Webster's has decided to issue$200,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares. Adam owns 100 shares of Webster's stock and has decided to continue holding those shares. Once Webster's issues the debt, Adam's total annual dividend income from these shares will: A. decrease from $300 to $215. B. increase from $200 to $315 . C. decrease from $300 to $270. D. increase from $200 to $270. E. remain constant. 23. Which one of the following statements is true concerning a bankruptcy? A. A Chapter 7 bankruptcy is a reorganization proceeding. B. A "prepack" is intended to shorten the time a firm spends in bankruptcy. C. The absolute priority rule applies to both Chapter 7 and Chapter 11 bankruptcy proceedings and must be adhered to by the courts. D. Creditors cannot force a firm into bankruptcy even though they might like to do so. E. A reorganization plan can only be approved if the firm's creditors all agree with the plan. 24. Which one of the following occurs if a firm files for Chapter 7 bankruptcy but does not generally occur if the firm files for Chapter 11 bankruptcy? A. a petition is filed in federal court B. administrative fees are incurred C. a list of creditors is compiled D. pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm E. a trustee-in-bankruptcy is elected by the creditors 25. Treynor's is an all-equity development company that has 15,000 shares of stock outstanding at a market price of $40 a share. The firm's earnings before interest and taxes are $20,000. Treynor's has decided to issue $140,000 of debt at a rate of 7.5 percent and use the proceeds to repurchase shares. Courtney owns 300 shares of Treynor's stock and wants to use homemade leverage to offset the leverage being assumed by the firm. Courtney should: A. borrow money and buy an additional 23 shares. B. borrow money and buy an additional 70 shares. C. sell 23 shares and loan out the proceeds. D. sell 48 shares and loan out the proceeds. E. sell 70 shares and loan out the proceeds. 26. Hazelton Bakers is an all-equity firm with a total market value of $650,000. The firm has 130,000 shares of stock outstanding. Management is considering issuing $250,000 of debt at an interest rate of 8 percent and using the proceeds to repurchase shares. The projected earnings before interest and taxes are $60,000. What are the anticipated earnings per share if the debt is issued? Ignore taxes. A. $.31 B. $.50 C. $.69 D. $1.47 E. $2.00 27. Assume both corporate taxes and bankruptcy costs apply to a firm. Given this, the static theory of capital structure illustrates that: A. the value of a firm and the firm's weighted average cost of capital are unrelated. B. the maximum firm value occurs at the point where the weighted average cost of capital is minimized. C. the maximum firm value and the minimum weighted average cost of capital occur at a debt-equity ratio of .50. D. the maximum firm value occurs when the weighted average cost of capital is less than optimal. E. the weighted average cost of capital for a firm declines as long as the debt-equity ratio increases. 28. Webster's is an all-equity firm that has 20,000 shares of stock outstanding at a market price of $45 a share. The firm has earnings before interest and taxes of $60,000 and has a 100 percent dividend payout ratio. Ignore taxes. Webster's has decided to issue $100,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares. Adam owns 100 shares of Webster's stock and has decided to continue holding those shares. By using homemade leverage to offset the leverage assumed by Webster's, Adam will receive annual income of: A. $270 from dividends and $30 from interest. B. $210 from dividends and $90 from interest. C. $160 from dividends and $140 from interest. D. $0 from dividends and $300 from interest. E. $300 from dividends and $0 from interest. 29. Which one of the following is correct based on the static theory of capital structure? A. A firm benefits most from debt financing when its tax rate is relatively low. B. There is an inverse relationship between the amount that a firm should borrow and the volatility of its earnings before interest and taxes. C. The costs of financial distress do not affect the value of a firm. D. The lower a firm's tax rate, the greater the firm's incentive to borrow. E. The benefit from the tax shield on debt is less than maximum at the optimal level of debt. 30. Which of the following statements correctly relate to M&M Proposition I, with taxes? I. Debt increases the value of a firm. II. The value of a firm unlevered is greater than the value levered. III. The weighted average cost of capital (WACC) is constant. IV. The interest tax shield is directly related to the debt-equity ratio for firms with positive net earnings. A. I only B. III only C. II and III only D. I and IV only E. I, III, and IV only 31. The static theory of capital structure demonstrates that a: A. firm loses value as soon as the first dollar of debt is incurred. B. firm's value is unaffected by the firm's debt-equity ratio. C. firm's value is linearly related to the firm's level of debt. D. firm maximizes its value by equating its business risks with its financial risks. E. firm needs to consider both the benefits and costs associated with debt financing. 32. The bankruptcy process has been utilized by firms as a means of: I. renegotiating labor contracts. II. reducing labor costs. III. avoiding payment of a legal judgment. IV. improving the firm's competitive position. A. I and II only B. III and IV only C. I, III, and IV only D. I, II, and III only E. I, II, III, and IV 33. Kalaway Importers is an all-equity firm with 16,000 shares of stock outstanding and a total market value of $280,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $31,000 if the economy is normal, $16,000 if the economy is in a recession, and $39,000 if the economy booms. Ignore taxes. Management is evaluating a $70,000 debt issue with a 7.5 percent coupon rate. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy booms? A. $2.11 B. $2.37 C. $2.81 D. $3.04 E. $3.16 34. Wes' Trucking just revised its capital structure from a debt-equity ratio of .25 to a debt-equity ratio of .40. The firm's shareholders who prefer the old capital structure should: A. sell some shares are hold the sale proceeds in cash. B. sell all of their shares and loan out the entire sale proceeds. C. do nothing. D. sell some shares and loan out the sale proceeds. E. borrow funds and purchase more shares. 35. Which one of the following statements concerning financial leverage is correct? A. The benefits of leverage are unaffected by the amount of a firm's earnings. B. The use of leverage will always increase a firm's earnings per share. C. The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage. D. Earnings per share are unaffected by changes in a firm's debt-equity ratio. E. Financial leverage is beneficial to a firm only when the firm has minimal earnings. 36. Hob-Nob is an all-equity firm that has 65,000 shares of stock outstanding. Kurt, the financial vice-president, is considering borrowing $240,000 at 8.5 percent interest to repurchase 15,000 shares. Ignoring taxes, what is the value of the firm? A. $.986 million B. $1.040 million C. $1.120 million D. $1.200 million E. $1.302 million 37. The Twin Sisters has a cost of equity of 18 percent, a return on assets of 14 percent, and a cost of debt of 7.5 percent. There are no taxes. What is the firm's weighted average cost of capital? A. 13.02 percent B. 14.00 percent C. 14.67 percent D. 14.93 percent E. 15.08 percent 38. A firm has a weighted average cost of capital of 9.6 percent and a cost of equity of 14.5 percent. The debt-equity ratio is .70. There are no taxes. What is the firm's cost of debt? A. 2.60 percent B. 3.18 percent C. 3.27 percent D. 3.33 percent E. 3.59 percent 39. Sylvester's has a 34 percent tax rate and an interest tax shield valued at $14,280 for the year. How much did the firm pay in annual interest? A. $4,855 B. $14,280 C. $42,000 D. $51,390 E. $55,400 40. Zeno Productions is comparing two separate capital structures. The first structure consists of 480,000 shares of stock and no debt. The second structure consists of 320,000 shares of stock and $12 million of debt. What is the price per share of equity? A. $48.00 B. $62.50 C. $67.50 D. $75.00 E. $87.50 41. Berwyn & Sons stock has a normal trading range of $21 to $29 a share. Recently, the firm hired a new CEO who has made dramatic, and effective, changes to the firm's operations. As a result, the stock has increased to $38 a share and is expected to increase at least another 25 percent. The firm's CFO is concerned about the stock price being so far above its normal trading range. Which one of the following actions should the firm take to address the CFO's concerns if the firm has no extra cash available to spend? A. declare a 10 percent stock dividend B. do a 1-for-2 reverse stock split C. do a 2-for-1 stock split D. declare a special dividend of $10 a share E. repurchase one-third of the outstanding shares 42. A stock repurchase: A. increases the number of shares outstanding. B. increases the earnings per share. C. increases the market price per share. D. does not affect the cash account. E. does not affect the book value of equity. 43. You own 300 shares of Dover Mills. The company just announced that it will pay a $.40 a share dividend next year. The following year, the firm is liquidating and expects to pay a final dividend of $14.20 a share. The required return on this stock is 18 percent. What will your homemade dividend per share be in year two if you only want a $.10 a share dividend next year? A. $14.39 B. $14.42 C. $14.47 D. $14.50 E. $14.55 44. Southern Fried Chicken is planning on paying a $1.30 a share dividend next year, a $1.40 per share dividend the following year, and a final liquidating dividend of $9.50 per share 3 years from now. The required return is 14.5 percent. How much will your homemade dividend be in three years if you opt to forego any dividend until then? A. $12.20 B. $12.47 C. $12.60 D. $12.81 E. $12.97 45. Macy Motors declared a dividend to holders of record on Monday, October 13, that is payable on Tuesday, October 21. Rosita purchased 100 shares of Macy Motors stock on Wednesday, October 8. Her brother, Raul purchased 100 shares of this stock on the following day. Which of the following statements are correct given this information? I. Rosita will receive the dividend that is payable on October 21. II. Raul will receive the dividend that is payable on October 21. III. Rosita purchased her shares on the ex-dividend date. IV. Raul purchased his shares on the ex-dividend date. A. I and III only B. II and IV only C. I and IV only D. I, II, and III only E. I, II, and IV only 46. A firm is considering spending $200,000 on either a stock repurchase or a cash dividend. Which one of the following will be the same whether the firm pays a dividend or repurchases stock? Assume there are no imperfections. A. number of shares outstanding B. price per share C. earnings per share D. price-earnings ratio E. tax effect on shareholders 47. Reverse stock splits are frequently done for which of the following reasons? I. to lower the stock price so that it returns to its normal trading range II. to eliminate small shareholders III. to meet the minimum price per share requirement of a stock exchange IV. to avoid delisting A. I and III only B. II and III only C. III and IV only D. II, III, and IV only E. I, II, III, and IV 48. Delta Cabinets has 13,000 shares of stock outstanding at a market price of $19 a share. The earnings per share are $1.34. The firm has current assets of $49,000, net fixed assets of $220,000, and total liabilities of $187,000. Today, the firm is paying a cash dividend of $.40 a share. Ignore taxes. After the dividend, the firm's: A. book value per share will be $6.31. B. price-earnings ratio will be 13.88. C. earnings per share will be $.94. D. stock price will be $19.00. E. shareholder value per share will be $18.60. 49. Morgantown Merchants is an all-equity firm with positive net income. Which one of the following will result if the firm pays a cash dividend? A. the number of shares outstanding will increase B. the earnings per share will decrease C. total assets will remain constant D. the price-earnings ratio will decrease E. total equity will increase 50. New England Fashions has 18,000 shares of stock outstanding at a market price of $29 a share. The earnings per share are $2.30. The firm has total assets of $280,000 and total liabilities of $136,000. Today, the firm is paying an annual cash dividend of $1.40 a share. Ignore taxes. After the dividend, the firm's: A. price-earnings ratio will be 12.61. B. earnings per share will be $.90. C. stock price will be $29. D. book value per share will be $6.60. E. shareholder value per share will be $27.60. 51. The common stock of Brook Myers, Inc. is selling for $38.50 a share and pays dividends annually. There are 15,000 shares outstanding. The firm has a target retention ratio of .7 and a tax rate of 35 percent. Dividend income is taxed at 15 percent. The company is paying a $1.06 per share dividend today. After the dividend, you would expect the stock price to be _____ and the price-earnings ratio to be _____. A. $37.60; 10.64 B. $37.60; 10.90 C. $37.60; 24.83 D. $38.50; 10.64 E. $38.50; 24.83 52. The Outlet is a specialty retail store that is on the decline. As such, the firm has decided to do an organized liquidation over the next two years. The firm is planning on paying a $2.10 a share dividend next year and projects that the final liquidating dividend the following year will be $15.50. The required return on this stock is 16 percent. How much will your liquidating dividend be if you decide to forego next year's dividend? A. $15.50 B. $17.60 C. $17.94 D. $18.27 E. $18.42 53. A stock dividend: A. reduces both the cash balance and the book value of equity. B. increases the number of shares outstanding, but does not affect shareholder wealth. C. is generally expressed as a ratio, such as 3-for-1. D. of 30 percent or less is called a small stock dividend. E. is basically the same as a stock repurchase. 54. Which of the following are goals of a compromise dividend policy? I. avoid dividend cuts II. avoid cutting back on positive NPV projects to pay a dividend III. maintain a target-debt equity ratio IV. avoid the need to sell equity A. I and II only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV 55. Which one of the following is the best reason for a firm with a primarily individual investor clientele to consider a stock split? A. a preference by the investors to own more, rather than fewer, shares B. the lack of funds for a cash dividend C. an increase in the size and popularity of mutual funds and pension plans D. the improvement in the liquidity of a firm's shares that generally follows a stock split E. a current market price that exceeds the normal trading range 56. If a firm follows a residual dividend policy, it will give precedence to: A. paying a constant dividend over changing the debt-equity ratio. B. paying dividends over accepting positive investments. C. lowering its desired debt-equity ratio over paying dividends. D. maintaining a desired debt-equity ratio over paying dividends. E. avoiding dividend cuts over changing the debt-equity ratio. 57. Bruceton Mills Trucking pays out 30 percent of its quarterly earnings as a quarterly dividend. This firm has a(n) _____ dividend policy. A. residual B. special C. cyclical D. liquidating E. extra 58. Which one of the following situations is most apt to result in a liquidating dividend payment? A. Gulf Port Marina recently sold its facility and is closing down the company. B. San Francisco Tours currently has excess cash that it wishes to distribute to its shareholders. This occurs every so often and when it does, the firm prefers to pass the extra cash along to its shareholders. C. Northern Electric is planning to increase its quarterly dividend by two percent. D. F&D Florists is preparing to pay its first annual dividend of $.20 a share. E. Gibson Toys was fortunate this year in that it developed a new toy that broke all previous toy sale records. The profits from this toy were phenomenal but the company realizes that the odds of this type of luck reoccurring are slight, at best. 59. Which two of the following are the primary goals of a residual dividend policy? I. maintaining the desired debt-equity ratio II. paying a regular fixed dividend III. meeting the firm's investment needs IV. increasing the dividend at a constant rate A. I and II B. II and III C. III and IV D. I and III E. II and IV 60. The tax law changes in 2003 set the maximum tax rate on dividend income received by individuals at _____ percent. A. 10 B. 15 C. 20 D. 35 E. 39 61. Which one of the following statements concerning IPOs and underpricing is correct? A. IPO underpricing primarily benefits the issuing firm. B. IPO underpricing generally increases the spread per share earned by underwriters. C. The more an issue is underpriced, the more it tends to be oversubscribed. D. Underpricing tends to discourage investors from participating in the IPO market. E. Undersubscribed shares generally tend to also be underpriced shares. 62. Which of the following have been given as reasons for IPO underpricing? I. Young firms tend to be very risky. II. The best IPOs are oversubscribed. III. Underwriters like to avoid lawsuits. IV. Underpricing helps counter the winner's curse. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV 63. Which one of the following statements concerning issue costs is correct? A. It costs more to issue debt securities than to issue equity securities. B. Economies of scale exist for the direct costs associated with both debt and equity issues. C. IPOs are less costly to issue than SEOs. D. Straight bonds are more costly to issue than convertible bonds. E. Total direct costs as a percentage of gross proceeds for IPOs averaged about 7 percent overall for the period 1990-2003. 64. The total direct costs of a debt issue, when expressed as a percentage of gross proceeds, tend to: A. increase as the quality of the debt increases. B. decrease as the size of the issue decreases. C. decrease when the bonds are convertible versus straight. D. decrease as the proceeds of the bond issue increase. E. currently average around 2.5 percent for investment grade, straight bonds. 65. Which one of the following statements is correct? A. The financial market tends to react the same whether a new issue of securities is a debt issue or an equity issue. B. The issuance of equity securities is always viewed as a positive event for the issuer. C. Informed managers tend to issue new securities when the existing securities are underpriced. D. An abnormal return of 5 percent is considered the norm. E. A firm's existing shareholders would prefer that new securities be issued when those securities are overpriced rather than underpriced. 66. Which of the following are qualifications that an issuer must meet to be eligible to use Rule 415 for shelf registration? I. issuer must have an investment grade rating II

 

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