Question 1. The "preferred" feature of preferred stock means that it normally will generate a higher total return for the stockholder than common stock.
a. True
b. False
Question 2. Which of the following statements concerning preferred stock is most correct?
a. Preferred stock generally has a higher component cost to the firm than does common stock.
b. By law in most states, all preferred stock issues must be cumulative, meaning that the cumulative, compounded total of all unpaid preferred dividends must be paid before dividends can be paid on the firm’s common stock.
c. From the issuer’s point of view, preferred stock is less risky than bonds.
d. Preferred stock, because of the current tax treatment of dividends, is bought mostly by individuals in high tax brackets.
e. Unlike bonds, preferred stock cannot have a convertible feature.
Question 3. Which of the following statements about warrants and convertibles is false?
a. Both warrants and convertibles are types of option securities.
b. One primary difference between warrants and convertibles is that warrants bring in additional funds when exercised, while convertibles do not.
c. The coupon rate on convertible debt is lower than the coupon rate on similar straight debt because convertibles are less risky.
d. The value of a warrant depends on its exercise price, its term, and the underlying stock price.
e. Warrants usually can be detached and traded separately from their associated debt.
Question 4. Which of the following statements about convertibles is true?
a. The coupon interest rate on convertibles is generally higher than on straight debt.
b. New equity funds are raised by the issuer when convertibles are converted.
c. Investors are willing to accept lower interest rates on convertibles because they are less risky than straight debt.
d. At issue, a convertible's conversion (exercise) price is often set equal to the current underlying stock price.
e. None of the above statements is true.
Question 5. The lease analysis should compare the cost of leasing to the
a. Cost of owning using debt.
b. Cost of owning using equity.
c. After-tax cost of debt to measure the effect of leasing on the cost of equity.
d. Average cost of all fixed charges.
e. Cost of owning using the weighted average cost of capital for the firm.
Question 6. Operating leases usually have terms that include
a. Maintenance of the equipment.
b. Only partial amortization.
c. Cancellation clauses.
d. All of the above.
e. Only answers a and c above.
Question 7. Heavy use of off-balance sheet lease financing will tend to
a. Make a company appear more risky than it actually is because its stated debt ratio will appear higher.
b. Make a company appear less risky than it actually is because its stated debt ratio will appear lower.
c. Affect a company's cash flows but not its degree of risk.
d. Have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
Question 8. In the lease versus buy decision, leasing is often preferable
a. Since it does not limit the firm's ability to borrow to make other investments.
b. Because, generally, no down payment is required, and there are no indirect interest costs.
c. Because lease obligations do not affect the riskiness of the firm.
d. All of the above are correct statements.
e. None of the above are correct statements.
Question 9. Which of the following statements concerning common stock and the investment banking process is false?
a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.
b. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market.
c. Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liqui¬dity and status probably outweigh the additional costs to the firm.
d. Stockholders have the right to elect the firm's direc-tors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer.
e. A large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost associated with the new issue.
Question 10. Which of the following factors will increase the likelihood that a company will choose to call its outstanding bonds?
a. An increase in the yield to maturity on the company’s outstanding bonds.
b. An increase in the call price of the outstanding bonds.
c. A reduction in the flotation costs associated with issuing new bonds.
d. Answers a and c are correct.
e. None of the answers above is correct.
Question 11. Which of the following statements is most correct?
a. In a private placement, securities are sold to private (individual) investors rather than to institutions.
b. Private placements occur most frequently in stock issues, but bonds can also be sold by private placement.
c. Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
d. The SEC requires that all private placements be handled by an investment banker.
e. The above statements are all false.
Question 12. Which of the following advantages of going public simultaneously implies a potential disadvantage of going public?
a. Facilitates in stockholder diversification.
b. Changes liquidity of the firm's stock.
c. Alters the difficulty associated with obtaining capital.
d. Establishes a market value for the firm.
e. Changes name recognition of the company.
Question 13. Which of the following statements is most correct?
a. If a company which produces military equipment merges with a company which manages a chain of motels, this is an example of a horizontal merger.
b. A defensive merger is where the firm's managers merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
c. Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
d. None of the statements above is correct.
e. Answers a and c are correct.
Question 14. Which of the following statements is most correct?
a. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
b. The smaller the synergistic benefits of a particular merger, the greater the incentive to bargain in negotiations, and the higher the probability that the merger will be completed.
c. Since mergers are frequently financed by debt more than equity, financial economies which imply a lower cost of debt or greater debt capacity are rarely a relevant rationale for mergers.
d. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification such as more stable earnings. However, since shareholders are free to diversify their own holdings at lower cost, such a rationale is generally not a valid motive for publicly held firms.
e. All of the answers above are correct.
Question 15. Which of the following statements is most correct?
a. Leveraged buyouts (LBOs) are where a firm issues equity and uses the proceeds to take a firm public.
b. In a typical LBO, bondholders do well but shareholders realize a decline in value.
c. Firms are unable to sell any assets in the first five years following a leverage buyout.
d. All of the answers above are correct.
e. None of the answers above is correct.