MBA 702 - Financial Management Test 3
Study Guide
A company's current cost of capital is based on: - ANSboth the returns currently required by its
debtholders and stockholders.
All else constant, which one of the following will increase a company's cost of equity if the
company computes that cost using the security market line approach? Assume the firm currently
pays an annual dividend of $1 a share and has a beta of 1.2. - ANSA reduction in the risk-free
rate
Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model (CAPM)
to determine its cost of equity. As a result, the company's cost of equity: - ANSis dependent
upon a reliable estimate of the market risk premium
A group of individuals got together and purchased all of the outstanding shares of common
stock of DL Smith Inc. What is the return that these individuals require on this investment
called? - ANSCost of equity
Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the: -
ANScost of debt
Which one of these will increase a company's after tax cost of debt? - ANSA decrease in the
company's tax rate
The cost of preferred stock is computed the same as the: - ANSrate of return on a perpetuity
A company's weighted average cost of capital: - ANSis the return investors require on the total
assets of the firm
The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is
weighted based on the company's capital structure is called the: - ANSweighted average cost of
capital
If a company uses its WACC as the discount rate for all of the projects it undertakes then the
company will tend to: - ANSincrease the average risk level of the company over time
The subjective approach to project analysis: - ANSassigns discount rate to projects based on
the discretion of the senior managers of a firm.
, When a manager develops a cost of capital for a specific project based on the cost of capital for
another firm which has a similar line of business as the project, the manager is utilizing the
_____ approach. - ANSpure play
Which one of these describes an exception to the registration filing requirement of the SEC? -
ANSIssues of less than $5 million
The Securities and Exchange Commission: - ANSreviews registration statements to ensure they
comply with current laws and regulations
What is a prospectus? - ANSa document that describes the details of a proposed security
offering along with relevant information about the issuer
Which one of the following is a preliminary prospectus? - ANSRed herring
Advertisements in a financial newspaper announcing a public offering of securities, along with a
list of the investment banks handling the offering, are called: - ANStombstones
What is an issue of securities that is offered for sale to the general public on a direct cash basis
called? - ANSGeneral cash offer
Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the
company is issuing additional shares and he is being given a chance to purchase some of these
shares prior to the shares being offered to the general public. What is this type of an offer
called? - ANSRights offer
Executive Tours has decided to go public and has hired an investment firm to handle the
offering. The investment firm is serving as a(n): - ANSunderwriter
Underwriters generally: - ANSaccept the risk of selling the new securities in exchange for the
gross spread.
A syndicate can be best defined as a: - ANSgroup of underwriters sharing the risk of selling a
new issue of securities.
Jones & Co. recently went public an received $23.07 a share of their entire offer of 30,000
shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer
price of $26.50 a share. What type of underwriting was this? - ANSFirm commitment
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public.
The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on
40,000 shares. Which one of the following terms best describes this underwriting? - ANSDutch
auction
Study Guide
A company's current cost of capital is based on: - ANSboth the returns currently required by its
debtholders and stockholders.
All else constant, which one of the following will increase a company's cost of equity if the
company computes that cost using the security market line approach? Assume the firm currently
pays an annual dividend of $1 a share and has a beta of 1.2. - ANSA reduction in the risk-free
rate
Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model (CAPM)
to determine its cost of equity. As a result, the company's cost of equity: - ANSis dependent
upon a reliable estimate of the market risk premium
A group of individuals got together and purchased all of the outstanding shares of common
stock of DL Smith Inc. What is the return that these individuals require on this investment
called? - ANSCost of equity
Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the: -
ANScost of debt
Which one of these will increase a company's after tax cost of debt? - ANSA decrease in the
company's tax rate
The cost of preferred stock is computed the same as the: - ANSrate of return on a perpetuity
A company's weighted average cost of capital: - ANSis the return investors require on the total
assets of the firm
The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is
weighted based on the company's capital structure is called the: - ANSweighted average cost of
capital
If a company uses its WACC as the discount rate for all of the projects it undertakes then the
company will tend to: - ANSincrease the average risk level of the company over time
The subjective approach to project analysis: - ANSassigns discount rate to projects based on
the discretion of the senior managers of a firm.
, When a manager develops a cost of capital for a specific project based on the cost of capital for
another firm which has a similar line of business as the project, the manager is utilizing the
_____ approach. - ANSpure play
Which one of these describes an exception to the registration filing requirement of the SEC? -
ANSIssues of less than $5 million
The Securities and Exchange Commission: - ANSreviews registration statements to ensure they
comply with current laws and regulations
What is a prospectus? - ANSa document that describes the details of a proposed security
offering along with relevant information about the issuer
Which one of the following is a preliminary prospectus? - ANSRed herring
Advertisements in a financial newspaper announcing a public offering of securities, along with a
list of the investment banks handling the offering, are called: - ANStombstones
What is an issue of securities that is offered for sale to the general public on a direct cash basis
called? - ANSGeneral cash offer
Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the
company is issuing additional shares and he is being given a chance to purchase some of these
shares prior to the shares being offered to the general public. What is this type of an offer
called? - ANSRights offer
Executive Tours has decided to go public and has hired an investment firm to handle the
offering. The investment firm is serving as a(n): - ANSunderwriter
Underwriters generally: - ANSaccept the risk of selling the new securities in exchange for the
gross spread.
A syndicate can be best defined as a: - ANSgroup of underwriters sharing the risk of selling a
new issue of securities.
Jones & Co. recently went public an received $23.07 a share of their entire offer of 30,000
shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer
price of $26.50 a share. What type of underwriting was this? - ANSFirm commitment
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public.
The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on
40,000 shares. Which one of the following terms best describes this underwriting? - ANSDutch
auction
