Which of the following is the fundamental difference between private (bank) debt and publicly issued debt? a. Public debt is often referred to as inside debt because of the close relationship between the lenders and the borrower, while a bank loan is called outside debt because the lender essentially has no active relationship with the […]
How does Jensen’s free cash flow hypothesis relate to a firm’s dividend policy? a. Dividends discipline management by forcing free cash flow to be disgorged to shareholders, thus mitigating management’s tendency to engage in empire building. b. Dividends act as a signal of firm value. c. Dividends solve the principal-agent problem between shareholders and creditors. […]
The aggressive financing strategy is risky in two aspects: a firm operates with a possibility of ________, and a firm has only a limited amount of ________ capacity. A) insolvency; short-term borrowing B) interest rate swings; short-term borrowing C) low earnings; long-term borrowing D) fixed interest rate; long-term borrowing ANSWER B
A decrease in the production time to manufacture a finished good will result in ________. A) an increase in the average age of inventory B) a decrease in the cash conversion cycle C) an increase in the cash conversion cycle D) a decrease in the average age of inventory ANSWER B
Suppose a firm wants to borrow $200 million for 10 years to fund capital expenditures, and is considering the choice of a private placement with several insurance companies or a public issue through an investment banking firm as underwriter. For simplicity, we will assume that in either case the firm will issue pure-discount bonds. The […]
A firm has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days. If the firm currently pays 12 percent for financing and reduces its cash conversion cycle to 50 days, the annual savings is ________. (Assume a 365-day year.) A) $4,652.19 B) $3,065.86 C) $5,917.81 D) $2,160.23 ANSWER C
The conservative financing strategy results in financing all projected funds requirements with ________ funds and use of ________ funds in the event of an unexpected cash outflow. A) long-term; short-term B) short-term; long-term C) permanent; seasonal D) seasonal; permanent ANSWER A
Under what circumstances would a firm engage in share repurchases rather than increasing dividends? a. If the firm has excess free cash flow that management expects will continue indefinitely. b. If the firm has excess free cash flow that management expects will be only temporary. c. If shareholders are in a lower tax bracket for […]
A firm wants to borrow $100 million for 5 years (pure discount, for simplicity). Which of the following sources has the lower effective interest cost? Orig. Fee/ Source Interest Rate Flotation Cost Private Placement 9. 00% 1% Public Issue 8.25% 3% a. The private placement b. The public issue c. The costs are the same […]
Which of the following correctly describes the Dutch auction method of share repurchase? a. The firm conducts open-market purchases. b. The firm specifies a price and a quantity of shares that it will repurchase. c. The firm auctions shares to the highest bidder, as long as that bidder meets the firm’s reservation price. d. The […]
