Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its capital structure. 
B) The most common choices for financing a new project are financing through equity alone and financing through a combination of debt and equity. 
C) The NPV created by a project represents the value to the new investors of the firm. 
D) When corporations raise funds from outside investors,they must choose which type of security to issue. 
A) The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its capital structure. 
B) The most common choices for financing a new project are financing through equity alone and financing through a combination of debt and equity. 
C) The NPV created by a project represents the value to the new investors of the firm. 
D) When corporations raise funds from outside investors,they must choose which type of security to issue.

Question 2

Use the following information to answer the question(s) below.
	
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million.

-Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the expected return of Nielson's stock just after the dividend is paid would be closest to:

Accepted Answer

A) -17.5%. 
B) -12.5%. 
C) 12.5%. 
D) 17.5%. 
A) -17.5%. 
B) -12.5%. 
C) 12.5%. 
D) 17.5%.

Question 3

Two separate firms are considering investing in this project.Firm Unlevered plans to fund the entire $80,000 investment using equity,while firm Levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.Calculate the expected returns for both the levered and unlevered firms.

Accepted Answer

@#IMG-DLM& PV(equity cash flows)= @#IMG-DLM& = $90,000
C/F (

Question 4

Use the information for the question(s)below.
Consider two firms: firm Without has no debt,and firm With has debt of $10,000 on which it pays interest of 5% per year.Both companies have identical projects that generate free cash flows of $1000 or $2000 each year.Suppose that there are no taxes,and after paying any interest on debt,both companies use all remaining free cash flows to pay dividends each year.
-Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows:

Accepted Answer

The answer of Use the information for the question(s)below.
Consider two...

Question 5

Use the following information to answer the question(s) below.
	
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million.

-Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the market value of its equity just after the dividend is paid would be closest to:

Accepted Answer

A) $0 million. 
B) $150 million. 
C) $250 million. 
D) $400 million. 
A) $0 million. 
B) $150 million. 
C) $250 million. 
D) $400 million.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) Leverage decreases the risk of the equity of a firm. 
B) Because the cash flows of the debt and equity sum to the cash flows of the project,by the Law of One Price the combined values of debt and equity must be equal to the cash flows of the project. 
C) Franco Modigliani and Merton Miller argued that with perfect capital markets,the total value of a firm should not depend on its capital structure. 
D) It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity. 
A) Leverage decreases the risk of the equity of a firm. 
B) Because the cash flows of the debt and equity sum to the cash flows of the project,by the Law of One Price the combined values of debt and equity must be equal to the cash flows of the project. 
C) Franco Modigliani and Merton Miller argued that with perfect capital markets,the total value of a firm should not depend on its capital structure. 
D) It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.

Question 7

Use the following information to answer the question(s)below.
Galt Industries has no debt,total equity capitalization of $600 million,and an equity beta of 1.2.Included in Galt's assets is $90 million in cash and risk-free securities.Assume the risk-free rate is 4% and the market risk premium is 6%.
-Galt's asset beta (i.e.the beta of its operating assets)is closest to:

Accepted Answer

A) 1.1. 
B) 1.2. 
C) 1.3. 
D) 1.4. 
A) 1.1. 
B) 1.2. 
C) 1.3. 
D) 1.4.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) Investors can alter the leverage choice of the firm to suit their personal tastes either by borrowing to reduce leverage or by holding bonds to add more leverage. 
B) On the market value balance sheet the total value of all securities issued by the firm must equal the total value of the firm's assets. 
C) The market value balance sheet captures the idea that value is created by a firm's choice of assets and investments. 
D) One application of MM Proposition I is the useful device known as the market value balance sheet of the firm. 
A) Investors can alter the leverage choice of the firm to suit their personal tastes either by borrowing to reduce leverage or by holding bonds to add more leverage. 
B) On the market value balance sheet the total value of all securities issued by the firm must equal the total value of the firm's assets. 
C) The market value balance sheet captures the idea that value is created by a firm's choice of assets and investments. 
D) One application of MM Proposition I is the useful device known as the market value balance sheet of the firm.

Question 9

Use the information for the question(s)below.
Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.The market value of Luther's non-cash assets is closest to:

Accepted Answer

A) $22 billion. 
B) $20 billion. 
C) $25 billion. 
D) $18 billion. 
A) $22 billion. 
B) $20 billion. 
C) $25 billion. 
D) $18 billion.

Question 10

Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Rearden borrows until they achieved a debt-to-equity ratio of 50%,then Rearden's levered cost of equity would be closest to:

Accepted Answer

A) 10.0%. 
B) 12.0%. 
C) 15.0%. 
D) 16.0%. 
A) 10.0%. 
B) 12.0%. 
C) 15.0%. 
D) 16.0%.

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) As long as investors can borrow or lend at the same interest rate as the firm,homemade leverage is a perfect substitute for the use of leverage by the firm. 
B) When investors use leverage in their own portfolios to adjust the leverage choice made by the firm,we say that they are using homemade leverage. 
C) The value of the firm is determined by the present value of the cash flows from its current and future investments. 
D) The investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of the firm. 
A) As long as investors can borrow or lend at the same interest rate as the firm,homemade leverage is a perfect substitute for the use of leverage by the firm. 
B) When investors use leverage in their own portfolios to adjust the leverage choice made by the firm,we say that they are using homemade leverage. 
C) The value of the firm is determined by the present value of the cash flows from its current and future investments. 
D) The investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of the firm.

Question 12

Use the information for the question(s)below.
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%.
-Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the value of the firm's levered equity from the project is closest to:

Accepted Answer

A) $0. 
B) $50,000. 
C) $90,000. 
D) $40,000. 
A) $0. 
B) $50,000. 
C) $90,000. 
D) $40,000.

Question 13

Equity in a firm with no debt is called:

Accepted Answer

A) levered equity. 
B) unlevered equity. 
C) riskless equity. 
D) risky equity. 
A) levered equity. 
B) unlevered equity. 
C) riskless equity. 
D) risky equity.

Question 14

Use the information for the question(s)below.
Assume that Rose Corporation's (RC)EBIT is not expected to grow in the future and that all earnings are paid out as dividends.RC is currently an all-equity firm.It expects to generate earnings before interest and taxes (EBIT)of $6 million over the next year.Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share.RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.
-Following the borrowing of $12 million and subsequent share repurchase,the expected earnings per share for RC is closest to:

Accepted Answer

A) $1.32. 
B) $1.44. 
C) $1.40. 
D) $1.20. 
A) $1.32. 
B) $1.44. 
C) $1.40. 
D) $1.20.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) Holding cash has the opposite effect of leverage on risk and return. 
B) We use the market value of the firm's net debt when computing its WACC and unlevered beta to measure the cost of capital and market risk of the firm's business assets. 
C) Since the WACC does not change with the use of leverage,the value of the firm's free cash flow evaluated using the WACC does not change,and so the enterprise value of the firm does not depend on its financing choices. 
D) Even if the firm's capital structure is more complex,the WACC is calculated by computing the weighted average cost of only the firm's debt and equity. 
A) Holding cash has the opposite effect of leverage on risk and return. 
B) We use the market value of the firm's net debt when computing its WACC and unlevered beta to measure the cost of capital and market risk of the firm's business assets. 
C) Since the WACC does not change with the use of leverage,the value of the firm's free cash flow evaluated using the WACC does not change,and so the enterprise value of the firm does not depend on its financing choices. 
D) Even if the firm's capital structure is more complex,the WACC is calculated by computing the weighted average cost of only the firm's debt and equity.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) The Law of One Price implies that leverage will affect the total value of the firm under perfect capital market conditions. 
B) In the absence of taxes or other transaction costs,the total cash flow paid out to all of a firm's security holders is equal to the total cash flow generated by the firm's assets. 
C) With perfect capital markets,leverage merely changes the allocation of cash flows between debt and equity,without altering the total cash flows of the firm. 
D) In a perfect capital market,the total value of a firm is equal to the market value of the total cash flows generated by its assets and is not affected by its choice of capital structure. 
A) The Law of One Price implies that leverage will affect the total value of the firm under perfect capital market conditions. 
B) In the absence of taxes or other transaction costs,the total cash flow paid out to all of a firm's security holders is equal to the total cash flow generated by the firm's assets. 
C) With perfect capital markets,leverage merely changes the allocation of cash flows between debt and equity,without altering the total cash flows of the firm. 
D) In a perfect capital market,the total value of a firm is equal to the market value of the total cash flows generated by its assets and is not affected by its choice of capital structure.

Question 17

Consider the following equation: E + D = U = A
The U in this equation represents:

Accepted Answer

A) the value of the firm's equity. 
B) the market value of the firm's assets. 
C) the value of the firm's unlevered equity. 
D) the value of the firm's debt. 
A) the value of the firm's equity. 
B) the market value of the firm's assets. 
C) the value of the firm's unlevered equity. 
D) the value of the firm's debt.

Question 18

Use the following information to answer the question(s)below.
d'Anconia Copper is an all-equity firm with 60 million shares outstanding,which are currently trading at $20 per share.Last month,d'Anconia announced that it will change its capital structure by issuing $300 million in debt.The $200 million raised by this issue,plus another $200 million in cash that d'Anconia already has,will be used to repurchase existing shares of stock.Assume that capital markets are perfect.
-Suppose you are a shareholder in d'Anconia Copper holding 300 shares,and you disagree with the decision to lever the firm.You can undo the effect of this decision by:

Accepted Answer

A) borrowing $2000 and buying 100 shares of stock. 
B) selling 100 shares of stock and lending $2000. 
C) borrowing $1200 and buying 60 shares of stock. 
D) selling 60 shares of stock and lending $1200. 
A) borrowing $2000 and buying 100 shares of stock. 
B) selling 100 shares of stock and lending $2000. 
C) borrowing $1200 and buying 60 shares of stock. 
D) selling 60 shares of stock and lending $1200.

Question 19

Use the information for the question(s)below.
Assume that Rose Corporation's (RC)EBIT is not expected to grow in the future and that all earnings are paid out as dividends.RC is currently an all-equity firm.It expects to generate earnings before interest and taxes (EBIT)of $6 million over the next year.Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share.RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.
-Prior to any borrowing and share repurchase,the equity cost of capital for RC is closest to:

Accepted Answer

A) 11%. 
B) 10%. 
C) 12%. 
D) 9%. 
A) 11%. 
B) 10%. 
C) 12%. 
D) 9%.

Question 20

What is the conservation of value principle?

Accepted Answer

With perfect capital markets,f

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Equity in a firm with no debt is called:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Consider the following equation: E + D = U = A The U in this equation represents:

What is the conservation of value principle?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 14: Capital Structure in a Perfect Market

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Equity in a firm with no debt is called:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Consider the following equation: E + D = U = A The U in this equation represents:

What is the conservation of value principle?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters