Toffeyton Corp. is experiencing losses and may soon go bankrupt. Which of the firm’s securities have first claim on the firm’s assets?

Toffeyton Corp. is experiencing losses and may soon go bankrupt. Which of the firm’s securities have first claim on the firm’s assets?

Subject: Business    / Finance   
Question

1. Toffeyton Corp. is experiencing losses and may soon go bankrupt. Which of the firm’s securities havefirst claim on the firm’s assets?

a. Senior debentures.b. Junior subordinated debentures.c. Preferred stock.d. Common stock. e. All have an equal claim and will share proportionally in any proceeds arising from bankruptcy.

2. Which of the following securities offers the investor a chance to gain from the growth in a firm'svalue?

a. Warrants b. Senior debenturesc. Junior subordinated debenturesd. None of the abovee. All of the above (a, b, and c)

3. Zeke analyzed the financial statements of two rival firms, PetBarn and BirdWorld. He found thatPetBarn has a DOL of 1.5, and a DFL of 2.0. BirdWorld has a DOL of 2.0 and a DFL of 1.0. What doesthis imply?

a. Both firms would likely be an equally good investment, if the economy is expected tostrengthen.b. Pet Barn would likely be a better investment, if the economy is expected to strengthen.c. BirdWorld would likely be a better investment, if the economy is expected to strengthen.d. Both firms will probably perform poorly if the economy strengthens, so neither would be adesirable investment at this time.

4. Cathy is an employee of Boise Financial (“firm B”). She learns that her firm is about to be acquiredby American Bank (“firm A”) What is her most likely reaction?

a. Excitement, since Boise Financial’s market value will likely rise.b. Fear, since she has an increased probability of being laid off.c. Disappointment, since she knows American Bank is probably overpaying for her firm.d. No reaction (neutral), since mergers seldom affect employees.

5. Over the past few years, what changes in corporate dividend policy have been occurring in themarketplace?

a. More firms are choosing to increase their cash dividend payments, or to begin paying cashdividends for the first time.b. More firms are choosing to reinvest their earnings, instead of paying substantial cashdividends.c. More firms are choosing to issue stock dividends, instead of cash dividends.d. On average, firms’ dividend policies have not changed noticeably over the past several years.

6. Which of the following events would usually be viewed as “good news” by investors in SmithCo?

a. SmithCo announces a 2­for­one reverse stock splitb. SmithCo announces it will purchase Borchard Products for $20 million.c. SmithCo announces its dividend will be increased from $1.00 per share to $1.15.d. All of the above are typically considered to be bullish events.

e. None of the above are typically considered to be bullish events.

7. Why do some firms establish a sinking fund when they sell a bond issue?

a. To set aside money on a regular basis to replace fully depreciated machinery and equipment.b. To set aside money on a regular basis to pay off bond principal.c. To set aside money on a regular basis to pay bond interest.d. To set aside money for purchasing Treasury shares.

8. Paragon Island is a small nation with no corporate income taxes. According to Modigliani and Miller,what would be the ideal dividend policy for firms headquartered on this island?

a. Pay all earnings as dividends, since shareholders’ value is based on the flow of dividend paymentsgenerated by a firm. b. Pay no dividends, since shareholders will benefit more if earnings are reinvested in growth­producing assets. c. Retain whatever earnings are needed for reinvestment as internally generated capital, then pay outresidual earnings (if any) as dividends. d. None of the above.

9. Which industry category below is currently considered a “special situation” (an industry in financialdistress) by many Wall Street analysts?

a. Electric utilitiesb. Banksc. Computer software publishersd. Airlines.e. All of the above.

10. Stafford Sausage has a CV of EBIT of .3, and a CV of EPS of .7. Marston Meat Products has a CVof EBIT of .5 and a CV of EPS of .8. What does this information imply?

a. Marston has more business risk than Stafford.b. Marston has more financial risk than Stafford. c. Both a and b. d. Neither a nor b.

11. Which of the following usually is the cheapest source of funds for a firm?

a. Internally generated equity capital (retained earnings)b. Long­term bondsc. Preferred stock d. Newly issued common stock

12. Olivia is retired and lives on interest and dividend income from her retirement portfolio. Which typeof security would she be LEAST likely to invest in?

a. Common stock of a biotechnology firmb. Common stock of an electric utilityc. Preferred stock d. Long­term bond

13. The net present value of project X is $2000, evaluated at a discount rate of 7%. The initial cashoutflow for this project is $8000. What does this imply?