Financial Management Problems



Fill in the blank using a number of terms listed below (@1 point). Above, Accounting profits, Accepted, Below, Beta coefficient, Bird-in-the-hand theory,
Capital-component, Capital structure, Clientele effect, Depreciation, Dividend, Dividend irrelevant theory, Dividend reinvestment plan, EPS, Ex-dividend date, Expected inflation, Going public,
Inf. Content of dividend,
Optimal distribution
policy, Residual distribution model, Risk free rate,
Scenario analysis, Simulation analysis,
Stock split,
Tax effects,
Tax preference theory, Treasury stock

1. Using the CAPM, the required rate of return on common stock is found as a function of the ________________, the firm’s____________________, and the required rate of return on an average stocks.
2. The two most important factors that affect the cost of capital and which are beyond the firm’s direct control are the level of __________________ rates and ______________.
3. A firm can affect its cost of capital through its ______________ policy, its _______________ policy, and its _________________(capital budgeting) policy.
4. If the expected rate of return on a given capital project lies __ ___________ the SML, the expected rate of return on the project is more than enough to compensate for its risk, and the project should be _________________.
5. Most firms employ several types of capital, called _ ________________, with common and preferred stock, along with debt, being the three most frequently used types.
6. The correct weights to use in the WACC calculation are those based on the firm’s __ __________ capital structure, since this is the best estimate of how the firm will, on average, raise money in the future.
7. For many firms, ___________________ is the largest source of funds as shown in their statement of cash flows and is available to support the capital budget.
8. Salvage value is the market value of an asset after its useful life. So it must be included in project cash flow estimation with their ____________________.
9. Since _________________ do not represent cash, they are of less fundamental importance than cash flows for investment analysis. Recall that in the stock valuation chapters we focused on dividends and free cash flows, which represent cash flows, rather than on ______________.
10. Since the cost of capital includes a premium for ___________________, failure to adjust cash flows means that the denominator, but not the numerator, rises with it, and this lowers the calculated NPV.
11. ___________________ involves working with continuous probability distributions, and the output is a distribution of net present values or rates of return. __ ______________ involves picking several points on the various probability distributions and determining cash flows or rates of return for these points.
12. The ______________________ is one that strikes a balance between dividend yield and capital gains so that the firm’s stock price is maximized.
13. The ____________________________ holds that dividend policy has no effect on either the price of a firm’s stock or its cost of capital.
14. The _________________________ assumes that investors value a dollar of dividends more highly than a dollar of expected capital gains. The ___________________ proposes that investors prefer capital gains over dividends, because capital gains taxes can be deferred into the future, but taxes on dividends must be paid as the dividends are received.
15. The _____________________ is a theory which holds that investors regard dividend changes as “signals” of management forecasts. Thus, when dividends are raised, this is viewed by investors as recognition by management of future earnings increases.
16. The _____________________ is the attraction of companies with specific dividend policies to those investors whose needs are best served by those policies. Thus, companies with high dividends will have a clientele of investors with low marginal tax rates and strong desires for current income.
17. The ______________________ states that firms should make distributions only when more earnings are available than needed to support the optimal capital budget.
18. The ____________________ is the date when the right to the dividend leaves the stock. This date was established by stockbrokers to avoid confusion and is 2 business days prior to the holder of record date. If the stock sale is made prior to the ex-dividend date, the dividend is paid to the buyer.
19. ____________________ allow stockholders to automatically purchase shares of common stock of the paying corporation in lieu of receiving cash dividends. There are two types of plans–one involves only stock that is already outstanding, while the other involves newly issued stock.
20. __________________ usually occur when the stock price is outside of the optimal trading range. Stock repurchases occur when a firm repurchases its own stock. These shares of stock are then referred to as ________________.
21. __________________ increases the liquidity of the stock, establishes a market value, facilitates raising new equity, and allows the original owners to diversify. But it increases business costs, requires disclosure of operating data, and reduces the control of the original owners


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