Lecture 1-2

Class MC exercise

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 FIN3004
Corporate Finance

Lecture 3
PowerPoint reading task

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Lecture 3 Dividend policy
• Please read the following slides
• Check your understanding of those slides by going
through MC exercise.

• Slides 5-13; 20-29

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Types of dividend
• A cash payment made by a firm to its owners in the
normal course of business is called a:
A. share repurchase.
B. liquidating dividend.
C. regular cash dividend.
D. special dividend.
E. extra cash dividend.

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Types of dividend
• A cash payment made by a firm to its owners when some
of the firm's assets are sold off is called a:
A. liquidating dividend.
B. regular cash dividend.
C. special dividend.
D. extra cash dividend.
E. share repurchase.

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Concept check (paying dividends)
• In USA, Leslie purchased 100 shares of GT, Inc. stock
on June 7th. Marti purchased 100 shares of GT, Inc.
stock on July 12th. GT declared a dividend on June
20th to shareholders of record on July 12th and payable
on August 1st. Which one of the following statements is
(T+1) correct?

A. Neither Leslie nor Marti are entitled to the dividend.

B. Leslie is entitled to the dividend but Marti is not.
C. Marti is entitled to the dividend but Leslie is not.
D. Both Marti and Leslie are entitled to the dividend.
E. Both Marti and Leslie are entitled to one-half of the
dividend amount.
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paying dividends
• The date on which the board of directors passes a
resolution authorizing payment of a dividend to the
shareholders is the _____ date.
A. ex-rights
B. ex-dividend
C. record
D. payment
E. declaration

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paying dividends
• The date by which a stockholder’s name is registered as
having share ownership in order to receive a declared
dividend is called the:
A. ex-rights date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. declaration date.

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paying dividends
• The date before which a new purchaser of stock is
entitled to receive a declared dividend, but on or after
which she does not receive the dividend, is called the
_____ date.
A. ex-rights
B. ex-dividend
C. record
D. payment
E. declaration

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Stock repurchase

• A firm has a market value equal to its book value.

Currently, the firm has excess cash of $800 and other
assets of $5,200. Equity is worth $6,000. The firm has
600 shares of stock outstanding.
• The firm has decided to spend all of its excess cash on
a share repurchase program. How many shares of stock
will be outstanding after the stock repurchase is
completed?
A. 480 shares
B. 500 shares
C. 520 shares
D. 540 shares
E. 560 shares
• One more question: what is the share price before and
after repurchase?
• Ans: _________

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Cash dividend
• A firm has a market value equal to its book value. The firm
has excess cash of $500 and other assets of $9,500. Equity
is worth $10,000. The firm has 250 shares of stock
outstanding.
• What will the stock price per share be if the firm pays out its
excess cash as a cash dividend?
A. $36
B. $38
C. $40
D. $42
E. $44
• One more question: what is the share price before cash
dividend?
• Ans: _________

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• An increase in a firm's number of shares outstanding
without any change in owners' equity is called a:
A. special dividend.
B. stock split.
C. share repurchase.
D. tender offer.
E. liquidating dividend.

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Concept check (Stock split)
• Robinson's has 15,000 shares of stock outstanding and a
market price of $36 a share. The firm just announced a
3-for-2 stock split. What will the market price per share
be after the split?
A. $18
B. $24
C. $42
D. $48
E. $54

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Concept check (Stock split)
• The Tinslow Co. has 125,000 shares of stock outstanding
at a market price of $93 a share. The company has just
announced a 7-for-3 stock split. What will the market
price per share be after the split?
A. $38.27
B. $39.86
C. $40.40
D. $46.18
E. $55.80

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• In a reverse stock split:
A. the number of shares outstanding increases and
owners' equity decreases.
B. the firm buys back existing shares of stock on the
open market.
C. the firm sells new shares of stock on the open market.
D. the number of shares outstanding decreases but
owners' equity is unchanged.
E. shareholders make a cash payment to the firm.

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 FIN3004
Corporate Finance

Lecture 4
PowerPoint reading task

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Lecture 4 Capital Structure I
• Please read the following slides
• Check your understanding of those slides by going
through MC exercise.

• Slides 4-18

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Basic Concepts- Capital Structure
• The firm's capital structure refers to:
• A. the way a firm invests its assets.
• B. the amount of capital in the firm.
• C. the amount of dividends a firm pays.
• D. the mix of debt and equity used to finance the firm's
assets.
• E. how much cash the firm holds.

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Basic Concept-Capital structure and leverage
• A levered firm is a company that has:

• A. Accounts Payable as the only liability on the balance

sheet.

• B. some debt in the capital structure.

• C. all equity in the capital structure.

• D. All of the above.

• E. None of the above.

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Capital structure and Goal of Financial management
• Katie is the CFO of Baxter International. If she has the
best interests of the firm's shareholders in mind, she will
maintain the capital structure for the firm which:
• A) minimizes the market value of the firm's debt.
• B) maximizes the market value of the firm.
• C) minimizes the book value of the firm's debt.
• D) maximizes the market value of the firm's debt.
• E) maximizes the book value of the firm's debt.

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Basic Concept-Capital structure and leverage
• A levered firm has:

• A. higher financial risk.

• B. higher business risk.

• C. lower ROE when the firm is doing well.

• D. All of the above.

• E. None of the above.

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Homemade Leverage
• The use of personal borrowing to change the overall
amount of financial leverage to which an individual is
exposed is called:
• A. homemade leverage.
• B. dividend recapture.
• C. the weighted average cost of capital.
• D. private debt placement.
• E. personal offset.

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 FIN3004
Corporate Finance

Lecture 05
Leverage & Capital Structure: Limits to the Use of
Debt

PowerPoint self-reading task

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Lecture 05 Capital Structure II
• Please read the following slides by yourself
• Check your understanding of those slides by going
through MC exercise.

• Slides 4-8; 16-17; 31-34

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• Financial distress can be best described by
which of the following situations in which the
firm is forced to take corrective action?
A. Cash payments are delayed to creditors.
B. The market value of the stock declines by
10%.
C. The firm's operating cash flow is insufficient
to pay current obligations.
D. Cash distributions are eliminated because
the board of directors considers the surplus
account to be low.
E. None of the above.
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• Financial restructuring can occur as:
A. a private workout.
B. an employee buy-out.
C. a bankruptcy reorganization.
D. Both A and C.
E. Both B and C.

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• Financial distress can involve which of the
following:
A. asset restructuring.
B. financial restructuring.
C. liquidation.
D. All of the above.
E. None of the above.

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• The difference between liquidation and
reorganization is:
A. reorganization terminates all operations of the firm and
liquidation only terminates non-profitable operations.
B. liquidation terminates only profitable operations and
reorganization terminates only non-profitable operations.
C. liquidation terminates all operations and
reorganization maintains the option of the firm as a going
concern.
D. liquidation only deals with current assets and
reorganization only consolidates debt.
E. None of the above.

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• What is the absolute priority rule of the following claims
once a corporation is determined to be bankrupt?
A. administrative expenses, wages claims, government
tax claims, debtholder and then equityholder claims
B. administrative expenses, wages claims, government
tax claims, equityholder and then debtholder claims
C. wage claims, administrative expenses, debtholder
claims, government tax claims and equityholder claims
D. wage claims, administrative expenses, debtholder
claims, equityholder claims and government tax claims
E. None of the above

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• Perhaps equally, if not more damaging are the
indirect costs of financial distress. Some
examples of indirect costs are:
A. loss of current customers.
B. loss of business reputation.
C. management consumed in survival and not
on a strategic direction.
D. All of the above.
E. Both A and B.

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Capital structure-limitations of debts
• The MM theory with taxes implies that firms should
issue maximum debt. In practice, this is not true
because:
A. debt is more risky than equity.
B. bankruptcy is a disadvantage to heavy debt
issuance
C. firms will incur large agency costs of short term
debt by issuing long term debt.
D. Both A and B.
E. Both B and C.

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Agency cost-underinvestment
• One of the indirect costs to bankruptcy is the
incentive toward underinvestment. The relevant
concept(s) for this incentive is/are:
A. the firm always choosing projects with the
positive NPVs.
B. the firm turning down positive NPV projects that
it would clearly accept in an all equity firm.
C. stockholders contributing the full amount of the
investment, but both stockholders and bondholders
sharing in the benefits of the project.
D. Both A and C.
E. Both B and C.
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Basic Concept-Capital structure and leverage
• In a world with taxes and financial distress, when a firm is
operating with the optimal capital structure:
I. the debt-equity ratio will also be optimal.
II. the weighted average cost of capital will be at its
minimal point.
III. the required return on assets will be at its maximum
point.
IV. the increased benefit from additional debt is equal to
the increased bankruptcy costs of that debt.
A. I and IV only
B. II and III only
C. I and II only
D. II, III, and IV only
E. I, II, and IV only
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Agency cost
• One of the indirect costs of bankruptcy is the
incentive for managers to take large risks. When
following this strategy:
A. the firm will rank all projects and take the project
which results in the highest expected value of the
firm.
B. bondholders expropriate value from
stockholders by selecting high risk projects.
C. stockholders expropriate value from
bondholders by selecting high risk projects.
D. the firm will always take the low risk project.
E. Both A and B.
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