Quiz 5 Flashcards
Flagstaff Inc. has a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. If Flagstaff’s has 0.5 debt to equity ratio, then Flagstaff’s reduction in WACC due to its interest tax shields is closest to:
-0.817%
Which of the following statements is FALSE?
Because the firm’s free cash flow (FCFF) is computed without considering the firm’s leverage, we account for the benefit of the interest tax shield by calculating the WACC using the pre-tax cost of debt.
Aside from direct costs of bankruptcy, a firm may also incur other indirect costs such as ________.
Loss of customers and suppliers
Which of the following statements is FALSE?
The tradeoff theory weighs the costs of debt that result from shielding cash flows from taxes against the benefits from the effects of bankruptcy associated with leverage.
When a firm’s investment decisions have different consequences for the value of equity and the value of debt, managers may take actions ________.
that benefit shareholders at the expense of debt holders
Groupon went public after listing on NASDAQ on Nov 4, 2011. In its first minutes as a public company, Groupon’s stock soared to about $28 from its $20/share IPO price. During that first morning of trading, its share price traded as high as $31. It ended the first day of trading at $26.11. Groupon’s underpricing was closest to:
31%
You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are now considering raising capital from a venture capital firm. This venture capital firm would invest $4 million and would receive 2 million newly issued shares in return. The post-money valuation of your firm is closest to ________.
$10.0 million
Which of the following is NOT a reason why an IPO is attractive to the managers of a private company?
It reduces the complexity of requirements regulating the company’s management.
Which of the following statements is FALSE?
The shares that are sold in the IPO may either be new shares that raise new capital, known as a secondary offering, or existing shares that are sold by current shareholders (as part of their exit strategy), known as a primary offering.
Which of the following statements regarding firm commitment IPOs is FALSE?
The underwriter purchases the entire issue at the offer price and then resells it at a slightly higher price to interested investors.
