study guide for final
Student: ___________________________________________________________________________
1.
Corporations pay regular cash dividends to their:
A. common shareholders.
B. preferred bondholders.
C. fixed-rate bondholders.
D. convertible bondholders.
2.
What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? The
price should:
A. increase by the amount of the dividend.
B. decrease by the amount of the dividend.
C. decrease by one-half the amount of the dividend.
D. remain constant.
3.
A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.
A. cash
B. earnings
C. earnings before interest and taxes
D. retained earnings
4.
An increase in share price following an increase in dividends is logical if the:
A. firm borrows to obtain cash for the dividend.
B. increased dividend signals higher future earnings.
C. dividend is believed to be temporary.
D. clientele effect is not important.
5.
Investors may prefer lower dividends over higher dividends because:
A. the low dividends are more predictable.
B. capital gains may be taxed less heavily than dividends.
C. of the "bird in the hand" logic.
D. low dividends indicate heavy investment for the future.
6.
Which of the following signals is most likely to elicit a decrease in share price?
A. A repurchase of 5% of the firm's stock
B. An increase in the regular quarterly dividend
C. A decrease in the regular quarterly dividend
D. Borrowing funds in order to pay a cash dividend
7.
Dividend changes are typically viewed by investors as signals of future changes in:
A. investment.
B. the firm's WACC.
C. earnings.
D. the clientele effect.
8.
Which of the following is correct for a firm with $400,000 in net earnings, 20,000 shares, and a 30%
payout ratio?
A. Retained earnings will increase by $120,000.
B. Each share will receive a $1.20 dividend.
C. $120,000 will be spent on new investment.
D. The dividend per share will equal $6.00.
9.
A firm is said to be "smoothing" dividends if dividends:
A. are paid through an automatic dividend reinvestment plan.
B. change more gradually than changes in earnings.
C. increase by the same dollar amount each year.
D. are paid only in even dollar amounts.
10. Why have firms been willing to borrow money in the absence of having sufficient cash to pay dividends?
A.
B.
C.
D.
Defaulting on dividends lowers credit ratings.
Borrowing is cheaper than paying to omit dividends.
Borrowing increases the firm's asset base.
Dividend cuts often signal bad future performance.
11. The date on which actual dividend checks are mailed to shareholders is the:
A. declaration date.
B. payment date.
C. ex-dividend date.
D. record date.
12. An investor who owns stock on the company's __________ date will receive the dividends declared.
A. ex-dividend
B. record
C. payment
D. declaration
13. Which of the following is the order in which key dividend dates occur?
A. Declaration, record, ex-dividend, payment
B. Declaration, ex-dividend, record, payment
C. Record, declaration, payment, ex-dividend
D. Ex-dividend, record, declaration, payment
14. When a corporation engages in a 10% stock repurchase, it:
A. offers shareholders 110 shares for every 100 they currently own.
B. purchases for cash 10% of the outstanding shares.
C. sells treasury stock at a 10% discount to investors.
D. purchases 10% of previously issued stock dividends.
15. Managers have been characterized as reluctant to increase dividends if:
A. dividends were increased in the preceding year.
B. earnings have permanently increased.
C. the dividend increase cannot be sustained.
D. the dividend payout ratio exceeds 20%.
16. A dividend is declared on January 1, has an ex-dividend date of January 20, and a record date of January
26. Which of the following shareholders will not receive the dividend?
A. A shareholder who purchases on December 31.
B. A shareholder who purchases on January 10.
C. A shareholder who purchases on January 19.
D. A shareholder who purchases on January 24.
17. The stock in your portfolio was selling for $40 per share yesterday, but has today declared a three-for-two
split. Which of the following statements seems to be true?
A. There will be two-thirds as many shares outstanding, and they will sell for $60.00 each.
B. There will be four times as many shares outstanding, and they will sell for $160.00 each.
C. There will be 50% more shares outstanding, and they will sell for $26.67 each.
D. There will be one-and-one-half times as many shares outstanding, and they will sell for $60.00 each.
18. Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order
to pay a cash dividend on existing shares?
A. The new shares are worth less than the old shares.
B. The old shares drop in value to equal the new price.
C. The value of the firm is reduced by the amount of the dividend.
D. The value of the firm is unaffected.
19. Conservative economists feel that high dividend payouts will increase share price because:
A. capital gains are less certain than dividends.
B. dividends signal higher future retained earnings.
C. stocks are priced using dividend discount models.
D. higher dividend payouts translate into higher investment returns.
20. A dividend clientele effect assumes that:
A. investors prefer higher rather than lower dividends.
B. shareholders are indifferent regarding dividends.
C. investors have specific dividend preferences.
D. investors have identical dividend preferences.
21. Why are dividend changes rather than their absolute level perceived to be more important to managers
and shareholders?
A. Managers change dividends only under threatening conditions.
B. Dividend changes are thought to signal future expectations.
C. MM state that the absolute level of dividends is irrelevant.
D. Changes determine whether borrowing must occur.
22. An investor owns 5,000 shares, which is 1% of a corporation's outstanding stock before a stock
repurchase. The investor did not sell any of his stock during the 25,000 share repurchase. Which of the
following statements is correct?
A. The investor still owns 1% of the corporation.
B. The stock's price is likely to drop by 5%.
C. The investor owns more than 1% of the corporation.
D. The investor now has 5,250 shares.
23. After the payment of a 25% stock dividend, an investor has 500 shares of stock and $400. What did the
investor have prior to the stock dividend?
A. 300 shares of stock
B. 400 shares of stock and $400
C. 400 shares of stock and $320
D. 625 shares of stock and $400
24. A firm's dividend policy involves a trade-off between:
A. a large asset base and a small asset base.
B. high share price versus low share price.
C. internal versus external financing of investment.
D. all of these.
25. When the firm has a high retention ratio, thus paying low dividends, the dividend is a by-product of what
kind of decision?
A. Borrowing
B. Debt policy
C. Financing
D. Capital budgeting
26. What are the four main ways to implement stock repurchase?
27. Compare and contrast share repurchases with dividend payouts.
28. A firm's permanent working capital refers to the:
A. difference between current assets and current liabilities.
B. minimum difference between current assets and current liabilities.
C. portion of net working capital that is financed from long-term sources.
D. amounts that must be held to meet debt covenants.
29. What was the sales volume in the current quarter if beginning accounts receivable, at $5,000, was $1,000
higher than ending, and $20,000 was collected?
A. $19,000
B. $20,000
C. $21,000
D. $24,000
30. Which of the following is correct for a firm that reduces its accounts receivable balance from the previous
quarter?
A. Collections exceeded beginning receivables balance.
B. Sales exceeded collections.
C. Beginning receivables balance exceeded sales.
D. Collections exceeded sales.
31. A line of credit would be considered:
A. an agreement to borrow up to a specific total amount on demand from a bank.
B. a short-term unsecured loan with minimum interest expense.
C. a secured loan to be amortized over three to five years.
D. a long-term, permanent source of funding.
32. A firm has borrowed $1 million and assigned its receivables to the lender. Because of defaults, the
receivables prove insufficient to cover the debt. In this case, the:
A. lender bears the risk of default.
B. firm bears the risk of default.
C. default risk is shared between lender and firm.
D. insurance carrier will bear the risk.
33. Customers may change firms when faced with minimal inventory selection. Sales lost in this manner
illustrate the:
A. costs of carrying inventory.
B. lack of customer loyalty.
C. need to maintain a high current ratio.
D. impact of shortage costs.
34. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory.
B. opportunity cost of capital.
C. aggregate of carrying and shortage costs.
D. amount of spoilage or pilferage.
35. What is the payable period for a firm with average accounts payable of $4 million and annual cost of
goods sold of $44 million.
A. 20.0 days
B. 30.0 days
C. 35.6 days
D. 33.2 days
36. A firm that follows a "relaxed strategy" toward the total capital requirement will be a:
A. short-term borrower.
B. short-term lender.
C. long-term lender.
D. long-term borrower.
37. A firm has $50 million and $60 million credit sales during the first two quarters of the year. Eighty
percent of the receivables are collected in the same quarter and the balance in the next quarter. What will
be the total collection for the firm in the second quarter?
A. $55 million
B. $58 million
C. $88 million
D. $98 million
38. If a firm decided to speed up its collection from its customers by reducing the receivables period and kept
the inventory period and payable period the same, then:
A. cash conversion cycle will increase.
B. cash conversion cycle will decrease.
C. the firm's investment in working capital will be minimized.
D. unable to determine from the information provided.
39. A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable. The net effect of these
transactions on the firm's net working capital is a decrease of:
A. $1,700,000.
B. $1,000,000.
C. $700,000.
D. $300,000.
40. When product demand is high, firms following a "middle of the road policy" for long- versus short-term
financing will:
A. borrow short term.
B. borrow long term.
C. hold marketable securities.
D. sell marketable securities.
41. What motivation is provided for managers not to follow the relaxed strategy of long- versus short-term
financing?
A. Transaction costs are required to continually obtain financing.
B. Short-term investment income is often unattractive.
C. Investment opportunities must frequently be ignored.
D. Long-term financing has burdensome tax consequences.
42. Why do firms need to invest in net working capital?
43. What is the length of the cash conversion cycle for a firm with $50,000 in inventory, $60,000 in average
receivables, $30,000 in average payables, annual sales of $700,000, and a cost of goods sold of 75%?
44. How does long-term financing policy affect short-term financing requirements?
45. Create the statement of sources and uses of cash from the following entries:
46. When shareholders attempt to garner additional votes in an attempt to oust management, it is called a:
A. management buyout.
B. tender offer.
C. proxy contest.
D. poison pill.
47. When one firm merges with another, the:
A. boards of directors will merge also.
B. merger must be approved by 75% of the shareholders of the target firm.
C. merger must be approved by at least 50% of the shareholders of the target firm.
D. target firm will cease to exist.
48. A tender offer is one in which the firm's:
A. management offers to sell the company to an acquirer.
B. board of directors offers to sell the company to the public.
C. shareholders are propositioned to sell their shares to outsiders.
D. management offers to buy all outstanding shares of the corporation.
49. When an outside group acquires a firm, primarily through the use of borrowed funds, the acquisition is
known as a:
A. management buyout.
B. tender offer.
C. leveraged buyout.
D. successful proxy fight.
50. If an automobile manufacturer were to acquire one of the firms listed below, which acquisition would be
called a horizontal merger?
A. A steel mill
B. A rival manufacturer
C. A tire producer
D. A bank
51. A conglomerate merger occurs when:
A. both partners are large in size.
B. large synergies are expected to develop.
C. firms from different industries merge.
D. both management teams remain intact after the merger.
52. Mergers may provide reductions in average production cost as a result of:
A. increased market share.
B. a more efficient management.
C. economies of scale.
D. diversification.
53. Diversification is often a poor motive for mergers because:
A. vertical integration is rarely successful.
B. investors can diversify on their own account.
C. it does not produce economies of scale.
D. the increase in taxes overcomes gains in earnings.
54. The cost of a merger equals the:
A. cash paid for the target firm.
B. increase in total earnings less price paid.
C. premium paid over the target's value as a separate entity.
D. sum of cash and stock paid for the target firm.
55. When a management team buys the firm from current shareholders while continuing to manage and often
incurring large segments of debt, it is known as a:
A. management buyout.
B. spin-off.
C. successful greenmail attempt.
D. corporate breakup.
56. When a management team buys the firm from current shareholders while continuing to manage and often
incurring large segments of debt, it is known as a:
A. management buyout.
B. spin-off.
C. successful greenmail attempt.
D. corporate breakup.
57. The merger between Chase Manhattan and Chemical bank is an example of a:
A. vertical merger.
B. horizontal merger.
C. conglomerate merger.
D. direct merger.
58. The merger between Chase Manhattan and Chemical bank is an example of a:
A. vertical merger.
B. horizontal merger.
C. conglomerate merger.
D. direct merger.
59. If Microsoft acquires Dell Computer, it will be an example of a:
A. vertical merger.
B. horizontal merger.
C. conglomerate merger.
D. distribution-channel merger.
60. An increase in earnings per share after a merger may not indicate increased value if the:
A. number of shares has increased.
B. price of the acquirer's stock increases.
C. price-earnings ratios were different in the premerger firms.
D. firm's additional earnings are spent on legal expenses of the merger.
61. The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:
A. provides immediate benefit through improved management.
B. does not offer a positive NPV from the merger.
C. stays in effect only until EPS are increased.
D. does not require the approval of a majority of shareholders.
62. Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense
of:
A. a higher price-earnings ratio.
B. higher total combined market value.
C. reduced future growth prospects.
D. increased free cash flow.
63. Firms that are acquired to take advantage of bootstrapping often have:
A. a lower price-earnings ratio than the acquirer.
B. a higher price-earnings ratio than the acquirer.
C. more outstanding shares than the acquirer.
D. a higher market valuation than the acquirer.
64. Firms A and B are each worth $50 million, but generate a $20 million gain when merged. If the cost of
the merger was $5 million, how much did firm A pay for firm B?
A. $50 million
B. $55 million
C. $60 million
D. $65 million
65. Firm B's 1 million shares of stock currently sell for $20 each. Firm A estimates the economic gain from
the merger to be $10 million and is prepared to offer $22 cash for each share of B. What percentage of the
merger gain will be captured by firm B's shareholders?
A. 20.00%
B. 33.33%
C. 50.00%
D. 60.00%
66. A merger adds value by creating synergies. Which of the following is not a possible source of synergy?
A.
B.
C.
D.
Economies of scale
Economies of vertical integration
Combined complementary resources
Diversification
67. In the case of a merger that is stock financed, the assumed merger cost may be incorrect if the:
A. value of the acquired firm's shares changes after the merger announcement.
B. value of the acquiring firm's shares changes after the merger announcement.
C. long-term interest rates increase.
D. merger is either horizontal or vertical.
68. How should the gains and costs of mergers to the acquiring firm be measured?
study guide for final Key
1. A
2. B
3. B
4. B
5. B
6. C
7. C
8. D
9. B
10. D
11. B
12. D
13. B
14. B
15. C
16. D
17. C
18. D
19. A
20. C
21. B
22. C
23. B
24. C
25. D
4. Direct negotiation. The firm may negotiate repurchase of a block of shares from a major shareholder. The most notorious examples are
greenmail transactions, in which the target of an attempted takeover buys out the hostile bidder. "Greenmail" means that the shares are repurchased
at a generous price that makes the bidder happy to leave the target alone.
3. Auction. The firm states a range of prices at which it is prepared to repurchase. Shareholders submit offers declaring how many shares they are
prepared to sell at each price, and the firm calculates the lowest price at which it can buy the desired number of shares.
2. Tender offer. The firm offers to buy back a stated number of shares at a fixed price. If enough shareholders accept the offer, the deal is done.
1. Open-market repurchase. The firm announces that it plans to buy stock in the secondary market, just like any other investor. This is by far the
most common method. There are limits on how many of its own shares a firm can purchase on a given day, so repurchases are spread out over
several months or years.
26. There are four main ways to implement a stock repurchase:
27. Share repurchases are similar to an extra or bumper dividend, in that they cause large amounts of cash to be paid to investors. However, they
are not a substitute for dividends. When a company announces a repurchase program, it is not making a long-term commitment to distribute more
cash. Thus, share repurchases are more volatile than dividends, increasing during boom times and falling in recessions. Mature, overcapitalized
companies or industries tend to have more share repurchase programs when investment (+NPVs) opportunities are limited. Since the 1980s, share
repurchases have increased substantially and are now larger in total value than dividend payments. Share repurchase, at market value, has the same
value impact as cash dividends.
28. C
29. A
30. D
31. A
32. B
33. D
34. C
35. D
36. B
37. B
38. B
39. C
40. A
41. B
Net working capital arises from lags between the time the firm obtains the raw materials for its product and the time it finally collects its bills from
customers. The cash conversion cycle is the length of time between the firm's payment for materials and the date that it gets paid by its customers.
The cash conversion cycle is partly within management's control. For example, it can choose to have a higher or lower level of inventories.
Management needs to trade off the benefits and costs of investing in current assets. Higher investments in current assets entail higher carrying
costs but lower expected shortage costs.
42. Short-term financial planning is concerned with the management of the firm's short-term, or current, assets and liabilities. The most important
current assets are cash, marketable securities, inventory, and accounts receivable. The most important current liabilities are bank loans and
accounts payable. The difference between current assets and current liabilities is called net working capital.
43.
44. The nature of the firm's short-term financial planning problem is determined by the amount of long-term capital it raises. A firm that issues
large amounts of long-term debt or common stock, or which retains a large part of its earnings, may find that it has permanent excess cash. Other
firms raise relatively little long-term capital and end up as permanent short-term debtors. Most firms attempt to find a golden mean by financing
all fixed assets and part of current assets with equity and long-term debt. Such firms may invest cash surpluses during part of the year and borrow
during the rest of the year.
45.
46. C
47. D
48. C
49. C
50. B
51. C
52. C
53. B
54. C
55. A
56. A
57. B
58. B
59. A
60. C
61. B
62. C
63. A
64. B
65. A
66. D
67. B
68. A merger generates an economic gain if the two firms are worth more together than apart. The gain is the difference between the value of the
merged firm and the value of the two firms run independently. The cost is the premium that the buyer pays for the selling firm over its value as
a separate entity. When payment is in the form of shares, the value of this payment naturally depends on what those shares are worth after the
merger is complete. The merger should proceed if the gain exceeds the cost.
study guide for final Summary
Category
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AACSB: Reflective Thinking
Blooms: Analyze
Blooms: Apply
Blooms: Remember
Blooms: Understand
Brealey - Chapter 17
Brealey - Chapter 19
Brealey - Chapter 21
Difficulty: 1 Easy
Difficulty: 2 Medium
Learning Objective: 17-01 Describe how dividends are paid and how corporations decide how much to pay.
Learning Objective: 17-02 Explain how stock repurchases are used to distribute cash to investors.
Learning Objective: 1703 Explain why dividend increases and repurchases are good news for investors and why dividend cuts are bad news.
Learning Objective: 19-01 Understand why the firm needs to invest in net working capital.
Learning Objective: 19-02 Show how long-term financing policy affects short-term financing requirements.
Learning Objective: 19-04 Develop a short-term financing plan that meets the firms need for cash.
Learning Objective: 19-04 Develop a short-term financing plan that meets the firms need for cash.
Learning Objective: 21-01 Explain why it may make sense for companies to merge.
Learning Objective: 21-02 Estimate the gains and costs of mergers to the acquiring firm.
Learning Objective: 21-03 Describe ways that companies change their ownership or management.
Topic: Cash Budgeting
Topic: Corporate Control
Topic: Dividend Policy
Topic: Evaluating Mergers
Topic: Long-and Short-Term Financing
Topic: Payout Policy
Topic: Reasons for a Merger
Topic: Sources of Short-Term Financing
Topic: Stock Splits and Repurchases
Topic: The Mechanics of a Merger
Topic: Working Capital
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