Question 1

Holding all else constant,an increase in dividend implies a:

Accepted Answer

When a company increases its dividends, it indicates that the company has confidence in its financial performance and is willing to reward its shareholders. This results in an increase in demand for the company's stock, which drives up the stock price. Therefore, the best choice is D, higher share price. The other options are not necessarily associated with an increase in dividends.

Question 2

Which of the following is true of the impact of dividend change on market value (MV)and book value (BV)?

Accepted Answer

D

Question 3

Which of the following is an incentive for managers to understate their company's earnings?

Accepted Answer

Understating a company's earnings can be a strategy to qualify for government assistance or protection against foreign competitors, by appearing in need of support due to lower profitability.

Question 4

Which of the following is the accurate algebraic expression of the dividend signalling model?

Accepted Answer

The dividend signalling model suggests that dividends convey information about a company's future earnings prospects. The correct algebraic expression that aligns with the principles of the dividend signalling model is: Operating cash flow = Investment expenditures - Change in equity + Dividends. This equation reflects how operating cash flow is affected by investment decisions, changes in equity, and dividend payments, indicating the company's financial health and future earnings potential.

Question 5

Which of the following could be a reason why managers bias their decisions towards actions that reveal the most favourable information to investors?

Accepted Answer

The answer of Which of the following could be a...

Question 6

Which of the following is true of equity returns at the time of dividend announcements?

Accepted Answer

Dividend announcements often serve as signals to the market about a company's financial health and future prospects. When earnings predictions are also released simultaneously, these can overshadow the signalling effect of dividend changes, making the dividends less informative or predictive about the company's future. This is because investors may focus more on the direct financial performance indicators provided by earnings forecasts than on the implications of dividend changes.

Question 7

During financial difficulties,a preference share issue may offer the best source of capital for a firm.Why?

Accepted Answer

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Question 8

If a project can be financed with riskless debt,then the share's intrinsic value will be equal to:

Accepted Answer

The intrinsic value of shares increases with the addition of a new project's NPV (Net Present Value) to the original assets' value, divided by the number of shares. This is because the NPV represents the project's expected earnings in today's dollars, and adding it to the original assets' value reflects the total value creation from undertaking the new project. Financing with riskless debt does not change this calculation, as it assumes the project's financing cost is certain and does not add risk to the shareholders.

Question 9

Which of the following is an assumption of the dividend signalling model?

Accepted Answer

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Question 10

Good decisions can reveal unfavourable information,and bad decisions can reveal favourable information.This means that:

Accepted Answer

The statement implies that a manager who is only concerned about short-term share prices may make decisions that may harm the long-term intrinsic value of the firm. Therefore, managers need to focus on making decisions that will increase the intrinsic value of the firm over the long-term, even if it means the share price may not increase immediately.

Question 11

Explain how capital structure of a firm conveys information to investors.

Accepted Answer

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Question 12

The intrinsic value of a firm refers to:

Accepted Answer

The intrinsic value of a firm refers to its full information value, which is an estimate of the true value of the firm's assets, operations, and potential for future earnings, based on all available information.

Question 13

A market-adjusted excess return is:

Accepted Answer

A market-adjusted excess return is the excess return an investment generates relative to its benchmark. It is calculated by subtracting the benchmark's return from the investment's return. In this case, the benchmark is represented by the market return on that date and the investment is represented by the equity. To adjust the investment's return for market risk, we must multiply its beta by the market return and subtract the result from the equity's return. Therefore, the correct formula is the equity's return less the equity's beta times the market return on that date.

Question 14

Adverse selection means that:

Accepted Answer

Adverse selection refers to the tendency of individuals to select their best actions based on their private information, which can create a situation where one party has more information than the other and can take advantage of it. This can lead to a breakdown in the market or, in the case of insurance and financial markets, higher costs and lower efficiency. Option A is incorrect because it describes mimicking behavior rather than adverse selection. Option B describes the conditions under which a firm might issue equity but does not define adverse selection. Option D describes random selection behavior, which is not necessarily adverse.

Question 15

Share prices react negatively,on average,to announcements that firms will:

Accepted Answer

When a firm announces that it will be raising capital, it often signals that the firm is financially weak or needs additional funds to execute its business plan. This can lead investors to react negatively and sell their shares, causing a decline in share prices.

Answer: D 
 When a firm announces that it will be retiring bonds before expiry, it can signal that the firm has excess funds and does not need to rely on debt financing. This can be seen as a positive for the firm, leading investors to react positively and potentially drive up share prices.

Question 16

Which of the following sources of capital is said to not create the problems associated with financial distress?

Accepted Answer

The answer of Which of the following sources of capital...

Question 17

Which of the following is true of a firm's capital structure and its value?

Accepted Answer

An increase in a firm's debt ratio is considered a favourable signal because it indicates that managers believe the firm will be generating taxable earnings in the future. This is because interest payments on debt are tax-deductible, which lowers the firm's taxable income and therefore its tax bill. This makes debt financing cheaper than equity financing, and therefore more attractive to firms that expect to generate taxable earnings in the future.

Question 18

Explain earnings manipulation.

Accepted Answer

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Question 19

Explain how the short-term and long-term investors are affected when the managers of a firm have better information.

Accepted Answer

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Quiz 19: The Information Conveyed by Financial Decisions