Ch 33-38 Flashcards
Which types of financial coverage ratios are there?
a)
Debt and interest coverage
b)
Balance sheet ratios or income statement ratios
c)
EBITA- and EBITDA-coverage
d)
Debt and equity coverage
a)
Debt and interest coverage
What credit rating should a large company target?
a)
BB+ and B
b)
A+ and BBB-
c)
AAA and BBB
d)
BBB+ to BBB-
b)
A+ and BBB-
- Which are the typical most highly leveraged industries?
a)
Luxury goods and consumer staples
b)
The automobile industry and chemicals
c)
Packaged consumer goods and utilities
d)
Pharmaceuticals and luxury goods
The most highly leveraged industries are typically mature and asset intensive (think cement, packaged consumer goods, and utilities). Their stable profits enable high tax savings from interest deductibility, and their low growth calls for strong management discipline, given the likelihood of overinvesting. Because such companies have assets that can serve as collateral and be redeployed after bankruptcy, their expected costs of business erosion are lower.
C) Packaged consumer goods and utilities
What has happened with the credit ratings over the last decade?
a)
They have declined on average because new companies have taken the opportunity to issue new bonds.
b)
They have declined on average because new companies have taken the opportunity to buy back shares.
c)
They have declined on average because of the increased business risk after the bankruptcy in the bank Lehman Brothers .
d)
They have declined on average because of large acquisitions.
a)
They have declined on average because new companies have taken the opportunity to issue new bonds.
- What is the median debt coverage for companies in S&P BBB (approximately)?
a)
1,5-2
b)
2,5-3,5
c)
3,5-4
d)
2-2,5
d)
2-2,5
- What median interest coverage ratio has companies in the group S&P BBB rating (approximately)?
a)
14
b)
16
c)
10
d)
12
c)
10
- What is the default probability after ten years in BBB debt and what is the spread in basis points the companies pay?
a)
5-6 percent
b)
4-5 percent
c)
2-3 percent
d)
0-1 percent
c)
2-3 percent
- How many of the companies with revenue over 1 billion EUR in Standards & Poors population has credit ratings between A+ and BBB-?
a)
70 percent
b)
60 percent
c)
40 percent
d)
50 percent
B) 60%
- What level should dividends be set at?
a)
The company should aim at a somewhat higher pay-out ratio than for the market
b)
It should be set at a level that the company can keep at the bottom of the earnings cycle.
c)
It should be set at a level equal to the pay-out ratio for the market.
b)
It should be set at a level that the company can keep at the bottom of the earnings cycle.
- What are the major advantages of taking on more debt?
a)
Lower efficiencies from tax benefits and enhances management discipline
b)
Lowers the WACC
c)
Higher efficiencies from tax benefits and enhances management discipline
d)
Higher efficiencies from tax benefits and an increase in investment in PPE, due to accelerated depreciation for tax purposes.
c)
Higher efficiencies from tax benefits and enhances management discipline
- How should share repurchases be used?
a)
To return excess cash before the dividend is delivered.
b)
To return excess cash above the dividend level.
c)
To return excess cash in stock markets where the dividend is heavily taxed.
d)
The company should long-term aim at distributing as much cash in share repurchases as in dividends.
b)
To return excess cash above the dividend level.
What is the drawback with extraordinary dividends?
a)
It creates an administrative process which is more costly than buying back shares.
b)
The negative effect is illusive and has more to with the profile than economy. It is regarded as more “old fashioned” compared to buying back shares.
c)
The tax on dividend is higher than the tax on a share price increase (which is the effect from the buy-back program creates)
d)
It forces cash payment on all shareholders, regardless if they need cash or not.
The drawback of extraordinary dividends, compared with share repurchases, is that they offer no flexibility to shareholders and force the cash payout on all of them, regardless of their preferences for capital gains or dividends.
D) It forces cash payment on all shareholders, regardless if they need cash or not.
- What are the myths about creating value by repurchasing shares?
a)
Managers can create value by repurchasing shares because it signals a new and persistent low-point for the regular dividend.
b)
Managers can create value by repurchasing shares when they are undervalued, because they have insider information to help them with the timing.
c)
Managers can create value by repurchasing shares because it decreases the risk management will use the cash to do a large acquisition.
d)
Managers can create value by repurchasing shares to use for employee stock options, which is a spitive signal to investors.
b)
Managers can create value by repurchasing shares when they are undervalued, because they have insider information to help them with the timing.
- How is normally a dividend increases interpreted by investors, and are they right?
a)
As good news, which is a misstake, since a dividend increase has very little connection to earnings growth.
b)
As good news, which is doubtful, since a dividend increase normally comes after strong revenue growth.
c)
As good news, which is correct, since a dividend increase normally comes after strong earnings growth.
d)
As good news, which is a mistake, since a most companies have dividend increase more governed by excess cash, than performance.
C) As good news, which is correct, since a dividend increase normally comes after strong earnings growth.
- How large part of cash distributions to shareholders in 2018 were share repurchases?
a)
80 percent
b)
60 percent
c)
70 percent
d)
50 percent
b)
60 percent
