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Question
According to the basic capital structure theory proposed by Modigliani and Miller (MM), when will a firm's value be maximum?
a. When it is financed entirely with equity.
b. When its capital structure contains 50 percent debt and 50 percent equity.
c. When it is financed entirely with retained earnings.
d. When it is financed with almost 100 percent through debt.
e. When its assets are financed with 50 percent equity and 50 percent retained earnings.
Answer
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Related questions
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Pelican Corporation is planning to invest $12,000 at the beginning of each of the next eight years. This form of cash flow pattern is known as a(n) _____.
a. immediate annuity
b. annuity due
c. uneven cash flow stream
d. ordinary annuity
e. deferred annuity
Q:
A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of cash flow pattern represents a(n) _____.
a. lump-sum payment
b. uneven cash flow stream
c. annuity due
d. ordinary annuity
e. immediate annuity
Q:
When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.
a. ordinary annuity
b. annuity due
c. immediate annuity
d. terminal annuity
e. discounted annuity
Q:
Which of the following agreements is included in the Basel III Accord (2010)?
a. Agreement to increase banks' capital (owners' equity) requirements in an effort to reduce the risk that mega bank failures will cause future financial crises
b. Agreement to put restrictions on the ability of the U.S. government to use taxpayers' funds to bail out large financial institutions
c. Agreement to create new organizations to help provide consumers clear and accurate information related to credit so that better-informed decisions can be made
d. Agreement to permit the U.S. government to purchase up to $700 billion in troubled mortgages in an attempt to improve liquidity in the financial markets
e. Agreement to limit the salaries of executives whose companies received Troubled Asset Relief Program (TARP) funds.
Q:
Which of the following is true about financial institutions in the United States compared to those in other countries?
a. U.S. financial institutions have been much more heavily regulated than their foreign counterparts with regard to expansion (branching) and the services that could be offered.
b. U.S. financial institutions have been regulated less than their foreign counterparts with regard to expansion (branching) and the services that could be offered.
c. U.S. financial institutions and their foreign counterparts have similar regulations with regard to expansion (branching) and the services that could be offered.
d. Most U.S. intermediaries are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of foreign financial institutions have been severely restricted until recently.
e. U.S. financial institutions and their foreign counterparts have similar regulations with regard to engaging in nonbanking activities.
Q:
Which of the following plans is administered primarily by the trust departments of commercial banks or by life insurance companies?
a. Health insurance plans
b. Underwriting plans
c. Shelf plans
d. Pension plans
e. Initial expansion plans
Q:
Which of the following financial intermediaries is also known as a savings and loan association?
a. Commercial bank
b. Credit union
c. Mutual fund
d. Thrift institution
e. Pension fund
Q:
A depository institution that is owned by its depositors, who are often members of a common organization or association, such as an occupation, a religious group, or a community, is called a(an) _____.
a. underwriting syndicate
b. mutual fund
c. investment bank
d. credit union
e. commercial bank
Q:
The process by which commercial banks transform funds provided by savers into funds used by borrowers is called _____.
a. investment banking
b. shelf registration
c. diversification
d. underwriting
e. financial intermediation
Q:
The expenditure incurred by a company in connection with its initial public offer is called the _____.
a. shelf registration cost
b. competitive spread
c. initiation cost
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e. bid spread
Q:
Devine Linens (DL) must raise $14,000,000 to support future growth. If it raises the funds by issuing stock, DL must pay an investment banker 5 percent of the total amount issued plus $250,000 in other costs associated with the issue. What is the amount of stock that DL must issue to net $14,000,000 after flotation costs?
a. $14,962,500
b. $14,950,000
c. $14,737,092
d. $15,000,000
e. $13,537,500
Q:
When issuing new securities, which of the following decisions is made jointly by a corporation and its investment banker?
a. Deciding whether to go for a competitive bid or a negotiated deal with the investment banker
b. Deciding which investment banker to use
c. Deciding whether to go for a best-efforts or underwritten issue
d. Deciding on the investment project for which to raise additional capital
e. Deciding which member of the senior management team deals with the investment banker
Q:
Zinc Corporation, a large, well-known public company that frequently issues securities, filed a master registration statement with the Securities and Exchange Commission (SEC). This master statement is updated with a short-form statement just prior to each individual security offering. What is this arrangement called?
a. Underwriting registration
b. Shelf registration
c. Best-effort registration
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Q:
If William earns a 10 percent return and Kate earns a 7 percent return on investments with the same risk, the additional 3 percent return on William's investment is a(n) _____.
a. risk adjusted return
b. justified return
c. abnormal return
d. efficient return
e. premium return
Q:
The form of informational market efficiency that states that current market prices fully reflect all information contained in past price movements is known as the _____.
a. economic efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. weak-form efficiency
e. real-time efficiency
Q:
When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(n) _____.
a. investment transfer
b. best-effort arrangement
c. underwriting
d. direct transfer
e. positive intermediation
Q:
As compared to U.S banks, foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue. Therefore, foreign banks often engage in numerous aspects of multilayer financial deals.
a. True
b. False
Q:
The existence of financial intermediaries greatly increases the efficiency of financial markets because, without them, savers would have to provide funds directly to borrowers, which would be a costlier process.
a. True
b. False
Q:
Under a best efforts arrangement, the investment banker purchases all of the shares from the issuing firm and then resells them to the public. Under this arrangement, the investment bank assumes significant risk.
a. True
b. False
Q:
An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.
a. True
b. False
Q:
Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock markets extremely competitive.
a. True
b. False
Q:
Dual listing of a stock leads to a decrease in the marketability of the stock.
a. True
b. False
Q:
The Securities and Exchange Commission (SEC) cannot exercise control over stock trades by corporate insiders.
a. True
b. False
Q:
Which of the following acts proposed the creation of new organizations to monitor rules associated with the capital, liquidity, and risk of financial institutions to help prevent future failures of mega financial organizations?
a. Securities and Exchange Commission Act
b. Wall Street Transparency and Accountability Act
c. Emergency Economic Stabilization Act of 2008
d. Basel III Accord (2010)
e. Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
Q:
In 2010, the Securities and Exchange Commission (SEC) announced its support for Generally Accepted Accounting Principles (GAAP).
a. True
b. False
Q:
The Securities and Exchange Commission (SEC) was created to develop and approve a set of common international accounting rules.
a. True
b. False
Q:
Ratio analysis involves a comparison of the relationships between financial statement accounts to analyze the financial position and strength of a firm.
a. True
b. False
Q:
All firms that are publicly traded in the United States will be required to adopt the _____ in the near future.
a. Generally Accepted Accounting Principles (GAAP)
b. Financial Accounting Standards Rules (FASR)
c. Governmental Accounting Standards Principles (GASP)
d. International Financial Reporting Standards (IFRS)
e. National Advisory Accounting Standards (NAAS)
Q:
Emerald Corporation's current ratio is 0.5, while Ruby (Emerald's competitor) Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?
a. The transactions will have no effect on the current ratios.
b. The current ratios of both firms will be increased.
c. The current ratios of both firms will be decreased.
d. Only Emerald Corporation's current ratio will be increased.
e. Only Ruby Company's current ratio will be increased.
Q:
Which of the following statements is true regarding debt ratios?
a. Firms with relatively low debt ratios have higher expected returns when business is good.
b. Firms with relatively low debt ratios are exposed to more risk compared to firms with relatively high debt ratios.
c. Firms with relatively high debt ratios have higher expected returns when business is bad.
d. Firms with relatively high debt ratios have higher expected returns when business is good.
e. Firms with relatively low debt ratios have higher expected returns when business is poor.