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What is commercial paper?
Alternative to bank financing, issued by corporations and due in a short period.
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What is the riskiest type of investment?
Warrants or options
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What is a nonmonetary default?
When a company breaks the covenants surrounding debt (such as a covenant not to take out more debt)
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What case held that "deepening insolvency" was actionable?
Lafferty
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What was the holding of Trenwick?
Deepening insolvency is not actionable.
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Between Trenwick and Lafferty, which is more followed?
Trenwick
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What was the holding of Fin Hay?
Courts will look at many factors to differentiate between "real debt" and equity disguised as debt.
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What case described the instrumentality doctrine?
Krivo
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What was the holding of Eliasen?
There is no obligation to debt holders outside of what is contracted for.
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When do companies buy back stock?
When they think their stock is undervalued.
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What are the factors Milken says should be considered when deciding on capital structure?
- SICSEG
- State of capital markets
- Industry Dynamics
- Company and management team
- Social trends
- Economy
- Government Regulation
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What are some factors that Fett considers in deciding if something is really debt?
- Intent of parties
- Formality
- Whether there is a fixed interest rate and maturity
- Source of interest payments
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What was the holding of Pathe Communications?
Businesses owe good faith and fair dealing on contracts with creditors
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What happens to interest prices when bond prices go up?
Interest prices go down
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How do you value a stream on interest payments on a bond?
Multiply the coupon rate by the principal, and then use the annuity table on the result.
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When converting EBIT to revenue, which is calculated first, interest or taxes?
Interest. Taxes are calculated after interest is deducted.
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What is a common mistake companies make when financing assets?
Not matching the length of the financing with the life of the asset.
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How could you get financing with accounts receivable and which option is better?
- 1. Getting a loan backed by AR
- 2. Factoring
- Geting a loan is better because of lower cost of borrowing
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What maneuver did Marv Lipton invent?
The poison pill
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What is the purpose of a poison pill?
To slow down an acquisition to negotiate a better price.
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What is equitable subordination?
When courts examine the money controllers put into a corporation to determine if it is true debt or disguised equity. Lenders care because they don't want other competing claims.
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What are two ways to deal with financial distress other than banktruptcy?
- Swapping debt for equity
- Swapping debt for debt
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What is the effect of a debt for equity swap on share price?
Share price may decline because shares are diluted, but may increase because company is more financially stable
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What duty does a board of directors owe to shareholders?
Fiduciary duty of care and loyalty.
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What duty does a board of directors owe to bond holders?
Contractual duties only unless company is in zone of insolvency. If in zone of insolvency, fiduciary duty is owed.
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How many majors has Tiger Woods won?
14
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What is Tiger Woods' real name?
Eldrick Tont Woods
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What are preemptive rights?
A shareholder's right of first refusal on new stock issued by a company he owns shares in to prevent dilution of his stock and voting power.
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Where are pre-emptive rights used today?
In venture capital.
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What does Stokes v. Continental trust stand for?
Preemptive rights are inherent to stock ownership
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What does Katzowitz v. Sidler stand for?
Preemptive rights don't protect shareholders in closely held companies, so courts will prevent the issue of new shares below market price without a good business reason.
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What did the securities act of 1933 do?
Required registration of IPOs and set rules for disclosure.
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What did the securities exchange act of 1934 do?
Mandated financial reporting from publicly traded companies.
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What protections do bondholders have if interest rates decline?
Call protection to prevent companies from calling bonds and refinancing covenants to prevent refinancing. Both work for a limited time.
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What is a sinking fund?
A fund where part of the principle of a bond is bought back during, enabling lower rates and, if interest rates increase, retiring debt at a discount.
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How are banks now acting like the bond market?
Trading debt rather than holding it
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What is current yield and what is the formula?
What rate a bond would yield in the first year if you bought it now. The formula is annual interest payment divided by closing price.
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What is yield to maturity?
What a bond would yield over the life of the obligation
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What indenture provision was added after RJR Nabisco?
Change of control covenants
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What is a maintenance covenant and who uses it?
A covenant that must be complied with constantly. Banks use it.
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What is an incurrence covenant and who uses it?
A covenant that must only be complied with when new debt is taken out. Bondholders use it.
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What is the holding in Nabisco?
Courts will not read in an implied change of control provision. Corporations have no duty to insure investors made a good investment.
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When does double declining balance depreciation switch to straight line?
In the last three years
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If the discount rate of a bond is the same as its coupon rate, what will the value of the bond be?
Face value
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What kind of fund would buy bonds with very high interest rates?
Distressed fund.
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What is cross default?
Covenant that defaulting on one bond will create defaults on others.
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Name three types of covenants
- Marketplace
- Operation
- Balance Sheet
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Give an example of a marketplace covenant
Call protection or refinancing covenants
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Give an example of an operations covenant
- Ebitda/interest expense ratio
- Minimum net worth
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Give an example of a balance sheet covenant
- Debt/equity ratio
- Senior debt/total debt ratio
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What is a money term?
Term of an indenture that requires unanimous consent to amend
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Name the three money terms
- Interest payment
- Sinking fund payment
- Maturity
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What duties do boards owe to convertible security holders?
Contractual duties only
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What is a conversion premium?
The premium you pay over market price for convertible stock
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How is conversion price for convertible stock set?
In the contract when the stock is sold.
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A warrant can be attached to a convertible bond. What is the difference between a synthetic and non-synthetic warrant?
Synthetic warrants may optionally be paid for from the bond, non-synthetic warrants must be paid from outside cash.
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What happens to holders of convertible security on a merger?
The holder has the right to receive the securities he would have received if he had converted before the merger.
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What is a type of company that tends not to pay dividends?
Growth companies.
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What does it mean if a company stops paying dividends?
The company is distressed
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What started the LBO craze?
Self-registration
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What are three test for determining if a lease is a capital lease? How many must be met?
- Lease transfers ownership before lease expires
- Lessee can purchase asset at end of lease for a bargain price
- Lease lasts for over 75% the useful life of the asset
- Only one term need be met
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What is goodwill?
The purchase price paid for a company in excess of its book value
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What do cash flow/operations covenants protect against?
Deterioration in the operation of the company.
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What do balance sheet covenants protect against?
Excessive debt "crudding up" the balance sheet.
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If a bond is bought at less than par value, which will be higher between current yield and yield to maturity?
Yield to maturity.
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What are two advantages preferred stock has over common?
- Guaranteed dividends
- Seniority
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What is sham preferred stock?
Preferred stock with no real preference over common stock.
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What is cumulative prefered stock?
Stock where past dividends must be paid out before dividends on common stock can be paid.
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What are the old and new methods of shareholder protection?
- Old: Minimum capital requirements
- New: Disclosure
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Why would a company issue preferred stock rather than debt?
Tax treatment
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What was the holding of Guttman v. Illinois Central RR? What happened afterward?
Preferred stock dividend extinguishes at the end of the year. Afterward all preferred stock was cumulative.
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What is perpetual preferred stock?
Preferred stock without a maturity date
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What is an exchangeable bond?
A bond exchangeable for a bond of another company
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What is the holding of Simons v. Cogan?
There are no fiduciary duties to convertible debt holders
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What is ratcheting?
When a company issues convertible securities at one conversion price, then again at a lower one. If you hold the old stock, you get to step down your conversion price.
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Name three ways corporations provide value for shareholders
- Cash dividends
- Spinoffs
- Stock Buyback
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