02 Jan Managers are much less

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.