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Multiple choice

Value of acquisition and NPV of mergers.
loatation costs and refunding NPV.
NAL and Lessee's analysis.
Conversion price, bonds with warrants, and convertibles.
Please see the attachment.
1. The "preferred" feature of preferred stock means that it normally will generate a higher total return for the stockholder than common stock.

a. True
b. False

2. Which of the following statements concerning preferred stock is most correct?

a. Preferred stock generally has a higher component cost to the firm than does common
b. By law in most states, all preferred stock issues must be cumulative, meaning that the
cumulative, compounded total of all unpaid preferred dividends must be paid before
dividends can be paid on the firm's common stock.
c. From the issuer's point of view, preferred stock is less risky than bonds.
d. Preferred stock, because of the current tax treatment of dividends, is bought mostly by
individuals in high tax brackets.
e. Unlike bonds, preferred stock cannot have a convertible feature.

3. Which of the following statements about warrants and convertibles is false?

a. Both warrants and convertibles are types of option securities.
b. One primary difference between warrants and convertibles is that warrants bring in
additional funds when exercised, while convertibles do not.
c. The coupon rate on convertible debt is lower than the coupon rate on similar straight
debt because convertibles are less risky.
d. The value of a warrant depends on its exercise price, its term, and the underlying
stock price.
e. Warrants usually can be detached and traded separately from their associated debt.

4. Which of the following statements about convertibles is true?

a. The coupon interest rate on convertibles is generally higher than on straight debt.
b. New equity funds are raised by the issuer when convertibles are converted.
c. Investors are willing to accept lower interest rates on convertibles because they are
less risky than straight debt.
d. At issue, a convertible's conversion (exercise) price is often set equal to the current
underlying stock price.
e. None of the above statements is true.

5. The lease analysis should compare the cost of leasing to the

a. Cost of owning using debt.
b. Cost of owning using equity.
c. After-tax cost of debt to measure the effect of leasing on the cost of equity.
d. Average cost of all fixed charges.
e. Cost of owning using the weighted average cost of capital for the firm.
6. Operating leases usually have terms that include

a. Maintenance of the equipment.
b. Only partial amortization.
c. Cancellation clauses.
d. All of the above.
e. Only answers a and c above.

7. Heavy use of off-balance sheet lease financing will tend to

a. Make a company appear more risky than it actually is because its stated debt ratio will
appear higher.
b. Make a company appear less risky than it actually is because its stated debt ratio will
appear lower.
c. Affect a company's cash flows but not its degree of risk.
d. Have no effect on either cash flows or risk because the cash flows are already
reflected in the income statement.

8. In the lease versus buy decision, leasing is often preferable

a. Since it does not limit the firm's ability to borrow to make other investments.
b. Because, generally, no down payment is required, and there are no indirect interest
c. Because lease obligations do not affect the riskiness of the firm.
d. All of the above are correct statements.
e. None of the above are correct statements.

9. Which of the following statements concerning common stock and the investment banking process is false?

a. The preemptive right gives each existing common stockholder the right to purchase
his or her proportionate share of a new stock issue.
b. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the
primary market.
c. Listing a large firm's stock is often considered to be beneficial to stockholders
because the increases in liqui¬dity and status probably outweigh the additional costs
to the firm.
d. Stockholders have the right to elect the firm's direc-tors, who in turn select the
officers who manage the business. If stockholders are dissatisfied with management's
performance, an outside group may ask the stockholders to vote for it in an effort to
take control of the business. This action is called a tender offer.
e. A large issue of new stock could cause the stock price to fall. This loss is called
"market pressure," and it is treated as a flotation cost because it is a cost associated
with the new issue.

10. Which of the following factors will increase the likelihood that a company will choose to call its outstanding bonds?

a. An increase in the yield to maturity on the company's outstanding bonds.
b. An increase in the call price of the outstanding bonds.
c. A reduction in the flotation costs associated with issuing new bonds.
d. Answers a and c are correct.
e. None of the answers above is correct.

11. Which of the following statements is most correct?

a. In a private placement, securities are sold to private (individual) investors rather than
to institutions.
b. Private placements occur most frequently in stock issues, but bonds can also be sold
by private placement.
c. Private placements are convenient for issuers, but the convenience is offset by higher
flotation costs.
d. The SEC requires that all private placements be handled by an investment banker.
e. The above statements are all false.

12. Which of the following advantages of going public simultaneously implies a potential disadvantage of going public?

a. Facilitates in stockholder diversification.
b. Changes liquidity of the firm's stock.
c. Alters the difficulty associated with obtaining capital.
d. Establishes a market value for the firm.
e. Changes name recognition of the company.

13. Which of the following statements is most correct?

a. If a company which produces military equipment merges with a company which
manages a chain of motels, this is an example of a horizontal merger.
b. A defensive merger is where the firm's managers merge with another firm to avoid or
lessen the possibility of being acquired through a hostile takeover.
c. Acquiring firms send a signal that their stock is undervalued if they choose to use
stock to pay for the acquisition.
d. None of the statements above is correct.
e. Answers a and c are correct.

14. Which of the following statements is most correct?

a. Tax considerations often play a part in mergers. If one firm has excess cash,
purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms
with excess cash rarely undertake mergers.
b. The smaller the synergistic benefits of a particular merger, the greater the incentive to
bargain in negotiations, and the higher the probability that the merger will be
c. Since mergers are frequently financed by debt more than equity, financial economies
which imply a lower cost of debt or greater debt capacity are rarely a relevant
rationale for mergers.
d. Managers who purchase other firms often assert that the new combined firm will
enjoy benefits from diversification such as more stable earnings. However, since
shareholders are free to diversify their own holdings at lower cost, such a rationale is
generally not a valid motive for publicly held firms.
e. All of the answers above are correct.

15. Which of the following statements is most correct?

a. Leveraged buyouts (LBOs) are where a firm issues equity and uses the proceeds to
take a firm public.
b. In a typical LBO, bondholders do well but shareholders realize a decline in value.
c. Firms are unable to sell any assets in the first five years following a leverage buyout.
d. All of the answers above are correct.
e. None of the answers above is correct.


Solution Summary

The solution explains some multiple choice questions in finance