Reference no: EM133306288

Questions

1. A company's payout policy involves how a firm chooses between the alternative ways to distribute free cash flow to equity holders.

True

False

2. The dividend declaration date is the date dividends are distributed to stockholders.

True

False

3. In a Dutch auction used for share repurchases, the firm makes a public announcement of an offer to all existing security holders to buy back a specified amount of outstanding securities at a prespecified price over a prespecified period of time.

True

False

4. Greenmail is used by management for share repurchasing to avoid a takeover threat and removal of its management by a major shareholder by buying out the shareholder, often at a large premium over the current market price.

True

False

5. In a perfect capital market, when a dividend is paid, the share price increases by the amount of the dividend when the stock begins to trade ex-dividend.

True

False

6. In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases.

True

False

7. In perfect capital markets, holding fixed the firm's investment policy, the firm's choice of dividend policy affects the value of the share price.

True

False

8. Equity financing does not carry the bankruptcy risk.

True

False

9. In a Chapter 11 bankruptcy, a trustee is appointed to oversee the liquidation of the firm's assets through an auction. The proceeds from the liquidation are used to pay the firm's creditors, and the firm ceases to exist.

True

False

10. Two examples of the direct cost of financial distress are the loss of customers and the loss of suppliers.

True

False

11. One of the key factors in determining the present value of financial distress costs is the probability of financial distress.

True

False

12. With respect to optimal leverage, the trade-off theory states that firms should increase their leverage until it reaches the level for which the firm value exceeds zero.

True

False

13. When capital markets are not perfect, market imperfections influence the firm's payout policy.

True

False

14. The lower tax rate on dividends makes it undesirable for a firm to raise funds to pay a dividend.

True

False

15. Generally, firms retain cash balances to cover potential future cash shortfalls, despite the tax disadvantage of retaining cash.

True

False