m3 - 1. When a firm announces an upcoming seasoned stock...

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1. When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to: A. decrease momentarily and then immediately increase substantially within the hour. B. respond but the direction of the response is not predictable as shown in past studies. C. increase. D. remain constant. E. decrease. 2. Prescription Express has a debt-equity ratio of .70. The pre-tax cost of debt is 8.5 percent while the unlevered cost of capital is 15 percent. What is the cost of equity if the tax rate is 35 percent? A. 18.40 percent B. 13.79 percent C. 17.96 percent D. 18.87 percent E. 14.28 percent 3. Ellie's Boutique has a bond issue outstanding that matures in fourteen years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 98 percent of face value and carry an 8 percent coupon. The firm's tax rate is 35 percent. What is the firm's aftertax cost of debt? A. 2.88 percent B. 5.36 percent C. 10.72 percent D. 5.45 percent E. 8.24 percent 4. The difference between the underwriters' buying price and the offering price of the securities to the public is called the: A. filing fee. B. underpricing. C. new issue premium. D. spread. E. extortion premium. 5. Sundial Enterprises common stock is currently priced at $33.20 a share. The company just paid $1.40 per share as their annual dividend. The dividends have been increasing by 3 percent annually and are expected to continue doing so. What is the cost of equity for Sundial Enterprises? A. 7.49 percent B. 7.82 percent C. 7.61 percent D. 7.34 percent E. 7.22 percent 6. Individuals who continually monitor the financial markets seeking mispriced securities: A. earn excess profits over the long-term. B. are overwhelmingly successful provided they trade within five minutes of their discovery. C. are never able to find a security that is temporarily mispriced. D. are always quite successful using only historical price information as their basis of evaluation. E. make the markets increasingly more efficient.
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7. According to theory, studying historical stock price movements to identify mispriced stocks: A. becomes ineffective as soon as the market gains semistrong form efficiency. B. is ineffective even when the market is only weak form efficient. C. is effective provided the market is only weak form efficient. D. is effective as long as the market is only semistrong form efficient. E. is ineffective only in strong form efficient markets. 8. The pecking order theory of capital structure argues that: I. the information asymmetry in the capital markets is the primary determinant of the capital structure policy II. bankruptcy and agency costs are more important than the information asymmetry costs when firms choose their form of financing III. there is a hierarchy in the form of capital used to finance new investments IV. firms have an optimal capital structure policy A. I, IV B. II, IV C. I, II D. I, III E. I, II, III 9. Which of the following statements are correct in relation to M&M Proposition II with no taxes?
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This note was uploaded on 05/06/2008 for the course CMST 2060 taught by Professor Wambaldorf during the Spring '08 term at LSU.

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m3 - 1. When a firm announces an upcoming seasoned stock...

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