1. Question
:
Which of the following statements is false?
The U.S. bankruptcy code was created to
organize this process so that creditors are treated fairly and the value of the
assets is not needlessly destroyed.
Because the assets of the firm might be more
valuable if kept together, creditors seizing assets in a piecemeal fashion
might destroy much of the remaining value of the firm.
Debt holders can then take legal action
against the firm to collect payment by seizing the firm’s assets.
The direct costs of bankruptcy are usually low
because experienced professionals handle the process in an efficient manner.
Instructor Explanation: CH16.2
Points Received: 10 of 10
Comments:
Question 2. Question
:
Which of the following statements is false?
The direct costs of bankruptcy are likely to
be higher for firms with more complicated business operations and for firms
with larger numbers of creditors, because it may be more difficult to reach
agreement among many creditors regarding the final disposition of the firm’s
assets.
A prepackaged bankruptcy is an attempt by
management to seize control of the firm at the expense of creditors through the
bankruptcy process.
A study of Chapter 7 liquidations of small
businesses found that the average direct costs of bankruptcy were 12% of the
value of the firm’s assets.
Studies typically report that the average
direct costs of bankruptcy are approximately 3% to 4% of the pre-bankruptcy
market value of total assets.
Question 3. Question
:
Which of the following statements is false?
Calculating the precise present value of
financial distress costs is a relatively straightforward process.
Two key qualitative factors determine the
present value of financial distress costs: the probability of financial
distress and the magnitude of the costs after a firm is in distress.
Technology firms are likely to incur high
costs when they are in financial distress, due to the potential for loss of
customers and key personnel, as well as a lack of tangible assets that can be
easily liquidated.
The magnitude of the financial distress costs
will depend on the relative importance of the sources of these costs and is
likely to vary by industry.
Question 4. Question
:
A type of agency problem that results in shareholders gaining
from decisions that increase the risk of the firm sufficiently, even if they
have negative NPV is:
asset substitution.
debt overhang.
underinvestment.
cashing out.
Question 5. Question
:
Which of the following statements is false?
One disadvantage of using leverage is that it
does not allow the original owners of the firm to maintain their equity stake.
The separation of ownership and control
creates the possibility of management entrenchment; facing little threat of
being fired and replaced, managers are free to run the firm in their own best
interests.
Managers also have their own personal interests,
which may differ from those of both equity holders and debt holders.
The costs of reduced effort and excessive
spending on perks are another form of agency cost.
Question 6. Question
:
The idea that when a seller has private information about the
value of good, buyers will discount the price they are willing to pay due to
adverse selection is known as the:
pecking order hypothesis.
signaling theory of debt.
lemons principle.
credibility principle.
Question 7. Question
:
Anyone who purchases the stock on or after the __________
date will not receive the dividend.
distribution
record
CORRECT ex-dividend
declaration
Question 8. Question
:
Which of the following statements is false?
When a firm pays a dividend, shareholders are
taxed according to the dividend tax rate. If the firm repurchases shares
instead, and shareholders sell shares to create a homemade dividend, the
homemade dividend will be taxed according to the capital gains tax rate.
When the tax rate on dividends exceeds the tax
rate on capital gains, shareholders will pay lower taxes if a firm uses share
repurchases for all payouts rather than dividends.
Firms that use share repurchases will have to
pay a higher pre-tax return to offer their investors the same after-tax return
as firms that use dividends.
The optimal dividend policy when the dividend
tax rate exceeds the capital gain tax rate is to pay no dividends at all.
Question 9. Question
:
Which of the following statements is false?
Tax rates vary by income, by jurisdiction, and
by whether the stock is held in a retirement account. Because of these
differences, firms may attract different groups of investors depending on their
dividend policy.
While many investors have a tax preference for
share repurchases rather than dividends, the strength of that preference
depends on the difference between the dividend tax rate and the capital gains
tax rate that they face.
Long-term investors are more heavily taxed on
capital gains, so they would prefer dividend payments to share repurchases.
One-year investors, pension funds, and other
non-taxed investors have no tax preference for share repurchases over
dividends; they would prefer a payout policy that most closely matches their
cash needs.
Question 10. Question
:
Which of the following statements is false?
Managers are much less committed to dividend
payments than to share repurchases.
Share repurchases are a credible signal that
the shares are under-priced, because if they are over-priced a share repurchase
is costly for current shareholders.
While an increase of a firm’s dividend may
signal management’s optimism regarding its future cash flows, it might also
signal a lack of investment opportunities.
Managers will be more likely to repurchase
shares if they believe the stock to be under-valued.
