Advanced Corporate Finance

The P/E ratio, or price-to-earnings ratio, is a financial metric used to assess the valuation of a company's stock. It is calculated by dividing the share price by the earnings per share (EPS). This ratio provides insight into how much investors are willing to pay for each dollar of earnings generated by the company. A higher P/E ratio suggests that investors have higher expectations for future earnings growth, while a lower ratio may indicate undervaluation or lower growth prospects. Therefore, the correct answer is that the P/E ratio is calculated by dividing the share price by the EPS.

The given equation SP = Equity / Shares Outstanding represents the calculation of the share price. The share price is determined by dividing the equity (the total value of a company's assets minus its liabilities) by the number of shares outstanding (the total number of shares that have been issued by the company and are held by investors). This equation allows investors to calculate the price they are willing to pay for a share of the company's stock based on its equity and the number of shares available in the market.

Real interest rates do not indicate the rate at which your money will grow if invested for a certain period. Real interest rates adjust for inflation and reflect the purchasing power of the money invested. The growth of money invested for a certain period is determined by the nominal interest rate, which does not take inflation into account.

The given answer is false because interest rates are not fundamentally determined by the Federal Reserve. While the Federal Reserve does play a role in influencing short-term interest rates through its control over the federal funds rate, interest rates are also influenced by various other factors such as market conditions, inflation, supply and demand for credit, and the overall health of the economy. Therefore, it is incorrect to say that interest rates are fundamentally determined solely by the Federal Reserve.

Equity holders do not have a legal obligation to receive dividends from the firm. Dividends are typically discretionary payments made by the firm to its equity holders, depending on the profitability and financial position of the company. While equity holders may have an expectation or desire to receive dividends, there is no legal obligation for the firm to pay them.

The given statement is false because the difference between an annuity and a perpetuity is that a perpetuity has no fixed end date and continues indefinitely, while an annuity has a fixed number of payments.

A voluntary reorganization of debts whereby a firm's debt obligations are still expected to be paid in full but at a later than originally scheduled date is called an extension. This means that the firm is seeking to delay the payment of its debts while still intending to fulfill its obligations in the future. This allows the firm to manage its cash flow and financial obligations more effectively. A composition refers to an agreement between a debtor and creditors to settle debts for less than the full amount owed, while creditor control suggests that the creditors have taken control of the firm's operations to manage its debts.

Most companies that pay dividends do not pay them semiannually.

The declaration date refers to the date on which the board of directors officially approves and announces the dividend payment to the shareholders. It is the first step in the dividend distribution process and signifies the company's intention to distribute dividends. The distribution date is the actual date on which the dividend is paid to the shareholders. The record date is the cut-off date set by the company to determine which shareholders are eligible to receive the dividend. The ex-dividend date is the date on which the stock starts trading without the dividend, meaning that if an investor buys the stock on or after this date, they will not be entitled to the upcoming dividend payment.

The statement "Fundamentally, interest rates are determined by the Federal Reserve" is false. While the Federal Reserve does have influence over interest rates, it does not directly determine them. Interest rates are influenced by various factors such as supply and demand for credit, inflation, economic conditions, and market forces. The Federal Reserve can influence interest rates through its monetary policy decisions, such as adjusting the federal funds rate, but it does not have complete control over determining interest rates.

The correct answer is "Real interest rates indicate the rate at which your money will grow if invested for a certain period." This statement is false because real interest rates do not indicate the rate at which your money will grow if invested. Real interest rates are adjusted for inflation and represent the purchasing power of your money. They do not directly indicate the growth rate of your investment.

Open market share repurchases refer to the practice of a firm buying back its own shares from the open market. This is the most common method used by firms to repurchase shares. In this method, the firm buys shares directly from existing shareholders through stock exchanges. It allows the firm to have more control over the timing and quantity of shares repurchased, and it also provides liquidity to shareholders who wish to sell their shares. This method is often preferred due to its flexibility and the ability to make purchases at market prices.

The given statement that "PV of a perpetuity = r/C" is false. The correct formula to calculate the present value of a perpetuity is PV = C/r, where PV represents the present value, C represents the cash flow, and r represents the discount rate.

The correct answer is "Ex-dividend." The term "ex-dividend" refers to the date on or after which a stock buyer will not receive the upcoming dividend payment. This means that if someone purchases the stock on or after the ex-dividend date, they will not be entitled to receive the dividend that is declared for that particular period.

The statement "Total return = earnings * by the dividend payout rate" is false because total return is calculated by adding the dividend yield and the capital appreciation of a stock, not by multiplying earnings by the dividend payout rate.

The correct answer is Dutch auction share repurchase. In a Dutch auction share repurchase, the firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price. This method allows the firm to determine the lowest price at which it can repurchase the desired number of shares, ensuring a fair and efficient process for both the firm and the shareholders.

The statement "Whether default occurs depends on the cash flow, not on the relative value of the firm's assets and liabilities" is false. In reality, default occurs when the value of a firm's liabilities exceeds the value of its assets, regardless of its cash flow. This is because the relative value of assets and liabilities determines the firm's ability to meet its financial obligations.

A firm can repurchase shares through a tender offer, which is a process in which the firm offers to buy shares at a pre-specified price within a short time period, typically within 20 days. During a tender offer, shareholders have the option to sell their shares back to the firm at the offered price. This method allows the firm to control the repurchase process and set the price at which they are willing to buy the shares.

The correct answer is "Record date." The record date is the specific date set by the board of a firm on which shareholders must be registered owners in order to receive a dividend payment. This date is used to determine which shareholders are eligible to receive the dividend and ensures that only those who are registered as owners on or before the record date will receive the payment. The declaration date is the date on which the board announces the dividend, the distribution date is the date on which the dividend is actually paid out, and the ex-dividend date is the date on which a stock begins trading without the right to receive the upcoming dividend.