1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT?
(a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
(d) For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions.
(e) The total value of the firm increases with the amount of debt. (Points : 20)
2. (TCO D) Which of the following is generally NOT true and an advantage of going public?
(a) Facilitates stockholder diversification.
(b) Increases the liquidity of the firm's stock.
(c) Makes it easier to obtain new equity capital.
(d) Establishes a market value for the firm.
(e) Makes it easier for owner-managers to engage in profitable self-dealings. (Points : 20)
3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the following: (Year 1) - 6,339; (Year 2) -4,764; (Year 3)-9,943; (Year 4) -5,640; all occurring at the end of respective years. The lease terms, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy?
(a) $849
(b) $896
(c) $945
(d) $997
(e) $1,047 (Points : 20)
4. (TCO I) Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
(a) 1 U.S. dollar = 0.6235 Canadian dollars
(b) 1 U.S. dollar = 0.6265 Canadian dollars
(c) 1 U.S. dollar = 1.0000 Canadian dollars
(d) 1 U.S. dollar = 1.5961 Canadian dollars
(e) 1 U.S. dollar = 1.6039 Canadian dollars (Points : 20)
1. (TCO C) D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?
Net Income Payout
(a) $898,750 55.63%
(b) $943,688 58.41%
(c) $990,872 61.43%
(d) $1,040,415 64.40%
(e) $1,092,436 67.62% (Points : 20)
2. (TCO F) Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?
(a) 7.83%
(b) 8.24%
(c) 8.65%
(d) 9.08%
(e) 9.54% (Points : 20)
3. (TCO B) Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?
(a) The company's net income would increase.
(b) The company's earnings per share would decline.
(c) The company's cost of equity would increase.
(d) The company's ROA would increase.
(e) The company's ROE would decline. (Points : 20)
(a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
(d) For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions.
(e) The total value of the firm increases with the amount of debt. (Points : 20)
2. (TCO D) Which of the following is generally NOT true and an advantage of going public?
(a) Facilitates stockholder diversification.
(b) Increases the liquidity of the firm's stock.
(c) Makes it easier to obtain new equity capital.
(d) Establishes a market value for the firm.
(e) Makes it easier for owner-managers to engage in profitable self-dealings. (Points : 20)
3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the following: (Year 1) - 6,339; (Year 2) -4,764; (Year 3)-9,943; (Year 4) -5,640; all occurring at the end of respective years. The lease terms, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy?
(a) $849
(b) $896
(c) $945
(d) $997
(e) $1,047 (Points : 20)
4. (TCO I) Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
(a) 1 U.S. dollar = 0.6235 Canadian dollars
(b) 1 U.S. dollar = 0.6265 Canadian dollars
(c) 1 U.S. dollar = 1.0000 Canadian dollars
(d) 1 U.S. dollar = 1.5961 Canadian dollars
(e) 1 U.S. dollar = 1.6039 Canadian dollars (Points : 20)
1. (TCO C) D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?
Net Income Payout
(a) $898,750 55.63%
(b) $943,688 58.41%
(c) $990,872 61.43%
(d) $1,040,415 64.40%
(e) $1,092,436 67.62% (Points : 20)
2. (TCO F) Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?
(a) 7.83%
(b) 8.24%
(c) 8.65%
(d) 9.08%
(e) 9.54% (Points : 20)
3. (TCO B) Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?
(a) The company's net income would increase.
(b) The company's earnings per share would decline.
(c) The company's cost of equity would increase.
(d) The company's ROA would increase.
(e) The company's ROE would decline. (Points : 20)
4. (TCO G) Chapter 7 of the Bankruptcy Act is designed to do which of the following?
(a) Protect shareholders against creditors.
(b) Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
(c) Ensure that the firm is viable after emerging from bankruptcy.
(d) Allow the firm to negotiate with each creditor individually.
(e) Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt. (Points : 20)
(a) Protect shareholders against creditors.
(b) Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
(c) Ensure that the firm is viable after emerging from bankruptcy.
(d) Allow the firm to negotiate with each creditor individually.
(e) Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt. (Points : 20)
1. (TCO I) In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S. dollars?
(a) $5.964 (b) $8,200 (c) $10,250 (d) $12,628 (e) $13,525 (Points : 20) |
2. (TCO H) Which of the following statements about valuing a firm using the APV approach is most CORRECT?
(a) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity. (b) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt. (c) The horizon value is calculated by discounting the expected earnings at the WACC. (d) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC. (e) The horizon value must always be more than 20 years in the future. (Points : 20) |
3. (TCO A) Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things constant?
(a) The price of these call options is likely to rise if XYZ's stock price rises. (b) The higher the strike price on XYZ's options, the higher the option's price will be. (c) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. (d) If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. (e) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. (Points : 20) |
4. (TCO F) Which of the following statements is most CORRECT?
(a) One advantage of forward contracts is that they are default free. (b) Futures contracts generally trade on an organized exchange and are marked to market daily. (c) Goods are never delivered under forward contracts, but are almost always delivered under futures contracts. (d) There are futures contracts for currencies but no forward contracts for currencies. (e) Futures contracts don't have any margin requirements but forward contracts do. (Points : 20) |
Comments
Post a Comment