corp finance final

formula for ratio long-term debt + equity

long-term debt / long term debt + equity

net stock issues by US nonfinacial companies in most years are small but positive T o F

F

most new capital investment by US companies is funded by retained earnings T o F

T

debt ratios in the US are lower than in most other developed economies

T

if a lender ranks behind the firms general creditors in the event of default the loan is said to be…

subordinated

interest on many bank loans is based on a ……. of interest

floating rate

what bond can be exchanged for shares of the issuing corporation?

convertible

what gives its owners the right to buy shares in the issuing company at a predetermined price?

warrant

dividends on……… cannot be paid unless the firm has also paid dividends on its …….

common equity, preferred equity

Banks are huge investors in corporate equity. T o F

F, Commercial banks are major sources of loans for companies. (In the United States, they are generally not allowed to make equity investments in companies; banks in most other countries can do so.)

Insurance companies are huge investors in corporate debt T o F

T

Rather than investing directly in corporate equities, most households prefer to pool their risk in a hedge fund. T o F

F, Hedge funds do not take investments from the retail investor, but rather from pension funds, endowment funds, and wealthy individuals.

Many individuals have a current account with an investment bank that then uses the cash to lend to industry. T o F

F, Commercial banks take deposits from individuals.

In 2024, Beta Corporation earned gross profits of $760,000.

1. Suppose that Beta was financed by a combination of equity and $1 million of debt. The interest rate on the debt was 10%, and the corporate tax rate in 2024 was 21%. How much profit was available for shareholders after payment of interest and corporate taxes?

521,400

Given

• Gross profit = $760,000

• Debt = $1,000,000

• Interest rate = 10%

• Corporate tax rate = 21%

Step 1: Compute interest expense

Interest=1,000,000×0.10=100,000

Step 2: Compute taxable income

Taxable income=760,000−100,000=660,000

Step 3: Compute corporate tax

Tax=660,000×0.21=138,600

Step 4: Profit available for shareholders

Profit to shareholders=660,000−138,600=521,400

In 2024, Beta Corporation earned gross profits of $760,000.

suppose that instead of issuing debt, Beta was financed by a combination of common equity and $1 million of preferred equity. The dividend yield on the preferred was 8%, and the corporate tax rate was still 21%. Recalculate the profit available for shareholders after payment of preferred dividends and corporate taxes.

Given

• Preferred equity = $1,000,000

• Dividend yield = 8%

• Corporate tax rate = 21%

• Preferred dividends are not tax-deductible

Step 1: Compute preferred dividend

Preferred dividend=1,000,000×0.08=80,000

Step 2: Corporate taxes apply to full gross profit Tax=760,000×0.21=159,600

Step 3: Net income after tax

Net income after tax=760,000−159,600=600,400

Step 4: Profit available for common shareholders

Profit to common shareholders=600,400−80,000=520,400

Which of the following features would increase the value of a corporate bond? Which would reduce its value?

The bond is convertible into shares.

increase value

Which of the following features would increase the value of a corporate bond? Which would reduce its value?

b. The bond is secured by a mortgage on real estate.

increase value

Which of the following features would increase the value of a corporate bond? Which would reduce its value?

c. The bond is subordinated.

reduce value

Financing for public companies must flow through financial markets. T o F

F

b. Financing for private companies must flow through financial intermediaries. T o F

F

c. Almost all foreign exchange trading occurs on the floors of the forex exchanges in New York and London. T o F

F

d. Derivative markets are a major source of finance for many companies.

T o F

F

a. Exchange-traded funds are hedge funds that can be bought and sold on the stock exchange. T O F

F

b. Hedge funds provide small investors with low-cost diversification. T O F

F

c. The sale of insurance policies is a source of financing for insurance companies. T O F

T

d. In defined-contribution pension plans, the pension pot depends on the rate of return earned on the contributions by the employer and employee. T O F

T

a. Direct holdings of equity by households are larger in Japan than in the United States.

F

b. Bank financing of companies is relatively important in Japan and continental Europe.

T

c. Intercompany loans and trade credit are particularly important in the United States.

F

Equity investment in start-up private companies is called:

Venture capital

The market for venture capital refers to the:

1. private financial marketplace for providing equity investment for small, start-up firms

2. bond market

3. market for providing equity to well-established firms

1 only

Arrange the following in chronological order for a typical start-up firm:

1. Angel Investor

2. mezzanine financing

3. VC financing

4. IPO

1, 3, 2, 4

Wealthy individuals who provide equity investment for new firms are called

angel investors

Large firms like Intel that provide equity capital to new innovative companies are called:

corporate ventures

Firms looking to raise funds will file registration statements with the:

SEC (security and exchange commission)

State laws that regulate sales of securities within the state are called:

blue-sky laws

An equity issue sold to the firm's existing stockholders is called a:

rights offer

The very first public equity sold by a company is referred to as:

initial public offering

When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, and so forth, it is called a(n):

private placement

The following capital expenditures are typically included in a firm's capital budget:

investments in a new office building

Stock option grants are generally a more appropriate form of compensation for lower-level managers than for higher-level managers.

F

In large public companies, monitoring is the primary responsibility of the:

Board of directors only

The free-rider problem, when referring to monitoring of the firms' performance, often results in:

ineffective monitoring by the shareholders, monitoring being delegated by shareholders to boards of directors, and no monitoring by a large number of small individual investors.

Shareholders typically rely on independent auditors to monitor the performance of their managers.

F

In the principal-agent framework, the ultimate principals are:

1. managers

2. board of directors

3. shareholders

4. governments

3 ONLY

The following are agency problems in capital budgeting except:

• empire building.

• entrenching investments.

• avoiding reasonable risks.

• accepting all positive NPV projects.

accepting all positive NPV projects.

The following are agency problems associated with capital budgeting:

reduced effort, perks or private benefits, empire building, entrenching investments, and avoiding risks.

Managers on a fixed salary often fall victim to the following temptations:

reduced effort, needless spending on perks or private benefits, empire building, entrenching investments, and avoiding risks.

Monitoring is typically done by:

shareholders, the board of directors, independent accountants, and lenders.

Agency costs can be reduced by:

monitoring managers' efforts, monitoring managers' actions, and intervening when managers veer off-course.

Nobel Laureate Milton Friedman builds which of the following assumptions into his argument for social responsibility of maximizing shareholder value?

• Government policy ensures companies will engage in socially responsible behavior

• Maximizing shareholder value gives shareholders maximum freedom to support the social objectives they care about

• Maximizing shareholder value requires companies to invest in stakeholders

• All of the above

All of the above

Stakeholder theory assumes which of the following has a comparative advantage in serving society?

corporations

The legal system in the U.S. is based on:

shareholder primacy

Shareholder capitalism is valid when lobbying is particularly strong.

F

Externalities, as defined by stakeholder capitalism, should be addressed by which of the following, according to Dr. Friedman?

Government, through laws and taxes

Stakeholder capitalism believes the motivation to help stakeholders is __________blankwhile shareholder capitalism believes it to be __________

INTRINSIC, INSTRUMENTAL

Briefly explain the difference between shareholder and stakeholder capitalism in its treatment of investments in stakeholders.

shareholder capitalism focuses on maximizing shareholder value, while stakeholder capitalism considers the interests of all stakeholders