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Page 1 ,,,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 greater than the WACC under MM’s original (with tax) assumptions.,(e) The total value of the firm is independent of the amount of debt it uses. (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) Buster’s Beverages is negotiating a lease on a new piece of equipment that would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. If the borrow and Purchase Option is used, the cash flows would be the following: (Year 1) -2,400; (Year 2) -3,800; (Year 3) -1,400; (Year 4) -79,600; all of these cash outflows would be at the beginning of the respective years. Alternatively, the firm could lease the equipment for 3 years, with annual lease payments of $29,000 per year, payable at the beginning of each year. The firm is in the 20% tax bracket. If it borrows and purchases, it could obtain a 3-year simple interest loan, to purchase the equipment at a before-tax interest rate of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL? ,,(a) $5,736,(b) $6,023,(c) $6,324,(d) $6,640,(e) $6,972 (Points : 20) ,, ,,,4. (TCO I) Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate? ,,(a) 1 pound = $1.8000,(b) 1 pound = $1.6582,(c) 1 pound = $1.0000,(d) 1 pound = $0.8500,(e) 1 pound = $0.6031 (Points : 20) ,, ,,,,,, ,Page 2 ,,,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) ,, ,,,,,, ,Page 3 ,,,1. (TCO I) If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a _____ to the spot rate. ,,(a) premium of 8%,(b) premium of 18%,(c) discount of 18%,(d) discount of 8%,(e) premium of 16% (Points : 20) ,, ,,,2. (TCO H) Which of the following statements about valuing a firm using the APV approach is most CORRECT? ,,(a) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.,(b) The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.,(c) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.,(d) The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.,(e) The APV approach stands for the accounting pre-valuation approach. (Points : 20) ,, ,,,3. (TCO A) Which of the following statements is CORRECT? ,,(a) Put options give investors the right to buy a stock at a certain strike price before a specified date.,(b) Call options give investors the right to sell a stock at a certain strike price before a specified date.,(c) Options typically sell for less than their exercise value.,(d) LEAPS are very short-term options that were created relatively recently and now trade in the market.,(e) An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex 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) ,, ,,,,,