Answer Options:
a. A hostile takeover are most likely to occur when a firm’s stock is selling below its intrinsic value as a result of poor management.
b. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
c. The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers.
d. In general, it is more in bondholders’ interests than stockholders’ interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development.
e. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm’s stock to sell at a price below its intrinsic value.
Answer: a
Question: Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.
a. True
b. False
Answer: b. False
Question: Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond’s face value.
Answer Options:
a. True
b. False
Answer: a
Question: In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price in the long run, or the stock’s “intrinsic value.”
a. True
b. False
Answer: True
Question: Preferred stock normally has no voting rights. However, most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.
Answer Options:
a. True
b. False
Answer: a. True
Question: The more conservative a firm’s management is, the higher its total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is likely to be.
a. True
b. False
Answer: b. False
Question: Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?
Answer Options:
a. The company’s dividend payment to common stockholders declined.
b. The company’s expenditures on fixed assets declined.
c. The company’s cost of goods sold increased.
d. The company’s depreciation expense declined.
e. The company’s interest expense increased.
Answer: d
Question: Other things held constant, the higher a firm’s total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)], the higher its TIE ratio will be.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. If a lower level person in a firm does something illegal, like “cooking the books,” to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
b. There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.
c. If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
d. Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.
e. Ethics is not an important consideration in business and in business schools.
Answer: c
Question: Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
a. True
b. False
Answer: a. True
Question: The corporate valuation model cannot be used unless a company pays dividends.
Answer Options:
a. True
b. False
Answer: b. False
Question: A stock’s market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock’s market price would equal its intrinsic value.
a. True
b. False
Answer: True
Question: The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.
Answer Options:
a. True
b. False
Answer: a. True
Question: If a stock’s market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
a. True
b. False
Answer: False
Question: The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.
Answer Options:
a. True
b. False
Answer: b. False
Question: Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock’s total market value, is then calculated, and that average return is often used as an indicator of the “return on the market.”
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a. Payment lags.
b. Payment for plant construction.
c. Cumulative cash.
d. Repurchases of common stock.
e. Writing off bad debts.
Answer Options:
a. Payment lags.
b. Payment for plant construction.
c. Cumulative cash.
d. Repurchases of common stock.
e. Writing off bad debts.
Answer: e
Question: If someone deliberately understates costs and thereby increases profits, this can cause the stock price to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and the firm itself can be penalized.
True
False
Answer: a. True
Question: For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
a. True
b. False
Answer: False
Question: One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm’s required return constant, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
Question: The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.
Answer Options:
a. True
b. False
Answer: a. True