P2B.3 RAISING CAPITAL

Question 1

TRUE/FALSE: Issuing firm gets more capital from secondary offerings

Answer 1

False! Only the shareholder (the seller) profits

Question 2

What is the journal entry of an operating lease in a lesse’s books?

Answer 2

Reasoning: What decreases when leasing from a business? Cash (an asset) –> CREDITED

What increases when leasing from a business? Rent expense (asset) –> DEBITED

Question 3

Net Advantage of Leasing (NAL)

Answer 3

1. ## Cost of asset (depreciation + delivery + installation of asset)
2. ## PV of After Tax Lease Payments
3. PV of depreciation tax shield
   +
4. ## PV of After Tax OPEX costs
5. PV of After Tax salvage value of asset

Question 4

Cash dividends payments ______ retained earnings

Answer 4

DECREASES (this will be DEBITED in the issuing firm’s books)

Question 5

TRUE/FALSE: Stock dividends affect the issuing firm’s equity account when issued

Answer 5

FALSE!

There’s no net impact as value of stocks merely transfer from retained earnings to capital stock and additional paid-in-capital

Question 6

What’s the journal entry of stock dividend declaration date?

Answer 6

Reasoning: what account is affected and how?

1. Liabilities –> Common Stock Dividends Payable and it ⇡–> CREDITED
2. Equity –> additional paid-in-capital and it ⇡- –> CREDITED
3. Equity –> retained earnings, which ⇣ –> DEBITED

Question 7

What’s the journal entry of a distribution of stock dividends?

Answer 7

Reasoning: what account is affected and how?

1. Liabilities – Common stock dividends payable and it ⇣ -→ DEBITED
2. Equity — Common Stock and it ⇡-→ CREDITED

Question 8

What’s the timeline of a dividend payment?

Answer 8

Declaration -→ Ex-dividend date -→ Holder-of record date -→ payable date

Question 9

Stock Repurchases

Answer 9

Company buys back its outstanding shares and hold it as Treasury Stock

Question 10

What’s the purpose of the Credit Rating Agencies?

Answer 10

Assess a corporate debtor’s risk or ability to repay debt

Question 11

Securities Act of 1933

Answer 11

Purpose: prevent fraud in securities sales by firms to disclose all financial info to investors

Question 12

Securities and Exchange Act of 1934

Answer 12

Oversees transactions of securities btwn parties who are not the original issuers in brokerage firms

Question 13

Stock Repurchases: what impact does it have on assets, liabilities and equity?

Answer 13

Asset: Cash decreases

Liabilities: no impact

Equity: Total equity ⇣ but EPS ⇡because there’s less stocks outstanding afterwards

Question 14

Stock splits: does it affect equity?

Answer 14

No!

Question 15

Stock splits: is it a taxable event?

Answer 15

No!

Question 16

Stock split: why would a firm do this in the first place?

Answer 16

Attract investors by increasing firm’s liquidity through increasing # of cs outstanding and making it cheaper for investors to buy shares (Market Price per share ⇣)

Question 17

Who regulates securities exchanges, brokers, dealers, and mutual funds to protect investors, and to promote fair dealing?

Answer 17

Securities and Exchange Commission

Question 18

TRUE/FALSE: Currencies are exchanged in foreign exchange markets and have no centralized platform

Answer 18

TRUE

Question 19

What’s the journal entry for a cash dividend on declaration date?

Answer 19

Dividends ALWAYS decreases retained earnings

DEBIT retained earnings

CREDIT dividends payable

Question 20

When marginal revenue > marginal costs, how can a firm maximize its profits?

Answer 20

⇡OUTPUT PRODUCED

⇣ SELLING PRICE

until MC = MR

Question 21

Equation: Gordon’s Growth Model

Answer 21

Price of stock = Dividends paid in the next year/[cost of capital - growth rate]