Question 1

The following equation: X =   rE +   rD
Can be used to calculate all of the following EXCEPT:

Accepted Answer

A) the cost of capital for the firm's assets. 
B) the levered cost of equity. 
C) the unlevered cost of equity. 
D) the weighted average cost of capital. 
A) the cost of capital for the firm's assets. 
B) the levered cost of equity. 
C) the unlevered cost of equity. 
D) the weighted average cost of capital.

Question 2

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.After the repurchase how many shares will Luther have outstanding?

Accepted Answer

A) 1.0 billion 
B) 1.2 billion 
C) 0.75 billion 
D) 1.1 billion 
A) 1.0 billion 
B) 1.2 billion 
C) 0.75 billion 
D) 1.1 billion

Question 3

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.
-The market capitalization of d'Anconia Copper before this transaction takes place is closest to:

Accepted Answer

A) $800 million. 
B) $900 million. 
C) $1100 million. 
D) $1200 million. 
A) $800 million. 
B) $900 million. 
C) $1100 million. 
D) $1200 million.

Question 4

Use the information for the question(s)below.
Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying Without stock.Using homemade leverage,you borrow enough in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock.The number of shares of Without stock you purchased is closest to:

Accepted Answer

A) 425. 
B) 1650. 
C) 2000. 
D) 825. 
A) 425. 
B) 1650. 
C) 2000. 
D) 825.

Question 5

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,RC's EPS is closest to:

Accepted Answer

A) $0.60. 
B) $1.00. 
C) $1.20. 
D) $0.50. 
A) $0.60. 
B) $1.00. 
C) $1.20. 
D) $0.50.

Question 6

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 project is sold to investors as an all-equity firm.The equity holders will receive the cash flows of the project in one year.The market value of the unlevered equity for this project is closest to:

Accepted Answer

A) $94,100. 
B) $90,000. 
C) $86,250. 
D) $98,600. 
A) $94,100. 
B) $90,000. 
C) $86,250. 
D) $98,600.

Question 7

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 risk premiums for both the levered and unlevered firms.

Accepted Answer

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

Question 8

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 enterprise value is closest to:

Accepted Answer

A) $90 million. 
B) $510 million. 
C) $600 million. 
D) $690 million. 
A) $90 million. 
B) $510 million. 
C) $600 million. 
D) $690 million.

Question 9

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%.
-The NPV for this project is closest to:

Accepted Answer

A) $6250. 
B) $14,100. 
C) $10,000. 
D) $18,600. 
A) $6250. 
B) $14,100. 
C) $10,000. 
D) $18,600.

Question 10

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 WACC is closest to:

Accepted Answer

A) 10.6%. 
B) 11.2%. 
C) 11.8%. 
D) 12.5%. 
A) 10.6%. 
B) 11.2%. 
C) 11.8%. 
D) 12.5%.

Question 11

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 you borrow only $45,000 in financing the project.According to MM proposition II,calculate the firm's equity cost of capital.

Accepted Answer

PV(equity cash flows - unlever

Question 12

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.
-Show mathematically that the stock price of RC won't change following the debt issuance and share repurchase.

Accepted Answer

EPS = (EBIT)/Shares outstanding = ($6M)/

Question 13

Use the following information to answer the question(s)below.
Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion.It also has $750 million in debt outstanding.Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt.Assume perfect capital markets.
-Suppose you are a shareholder in Galt industries holding 100 shares,and you disagree with this decision to delever the firm.You can undo the effect of this decision by:

Accepted Answer

A) borrowing $1500 and buying 60 shares of stock. 
B) selling 32 shares of stock and lending $800. 
C) borrowing $1000 and buying 40 shares of stock. 
D) selling 40 shares of stock and lending $1000. 
A) borrowing $1500 and buying 60 shares of stock. 
B) selling 32 shares of stock and lending $800. 
C) borrowing $1000 and buying 40 shares of stock. 
D) selling 40 shares of stock and lending $1000.

Question 14

Use the information for the question(s)below.
Luther Industries has no debt,a total equity capitalization of $20 billion,and a beta of 1.8.Included in Luther's assets are $4 billion in cash and risk-free securities.
-Considering the fact that Luther's Cash is risk-free,Luther's unlevered beta is closest to:

Accepted Answer

A) 1.90. 
B) 2.25. 
C) 1.50. 
D) 1.45. 
A) 1.90. 
B) 2.25. 
C) 1.50. 
D) 1.45.

Question 15

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.
-At the conclusion of this transaction,the number of shares that d'Anconia Copper will repurchase is closest to:

Accepted Answer

A) 5 million. 
B) 15 million. 
C) 20 million. 
D) 40 million. 
A) 5 million. 
B) 15 million. 
C) 20 million. 
D) 40 million.

Question 16

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 $80,000 at the risk-free rate,then the cost of capital for the firm's levered equity is closest to:

Accepted Answer

A) 45%. 
B) 25%. 
C) 15%. 
D) 95%. 
A) 45%. 
B) 25%. 
C) 15%. 
D) 95%.

Question 17

Use the following information to answer the question(s)below.
Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion.It also has $750 million in debt outstanding.Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt.Assume perfect capital markets.
-The number of shares that Galt must issue is closest to:

Accepted Answer

A) 15 million. 
B) 25 million. 
C) 30 million. 
D) 40 million. 
A) 15 million. 
B) 25 million. 
C) 30 million. 
D) 40 million.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) If we can identify a comparison firm whose assets have the same risk as the project being evaluated,and if the comparison firm is levered,then we can use its equity cost of capital as the cost of capital for the project. 
B) We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital,which we refer to as the firm's weighted average cost of capital (WAC
C) . 
C) The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered. 
D) When evaluating any potential investment project,we must use a discount rate that is appropriate given the risk of the project's free cash flow. 
A) If we can identify a comparison firm whose assets have the same risk as the project being evaluated,and if the comparison firm is levered,then we can use its equity cost of capital as the cost of capital for the project. 
B) We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital,which we refer to as the firm's weighted average cost of capital (WAC
C) . 
C) The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered. 
D) When evaluating any potential investment project,we must use a discount rate that is appropriate given the risk of the project's free cash flow.

Question 19

Use the information for the question(s)below.
Rockwood Enterprises is currently an all-equity firm and has just announced plans to expand their current business.In order to fund this expansion,Rockwood will need to raise $100 million in new capital.After the expansion,Rockwood is expected to produce earnings before interest and taxes of $50 million per year in perpetuity.Rockwood has already announced the planned expansion,but has not yet determined how best to fund the expansion.Rockwood currently has 16 million shares outstanding and following the expansion announcement these shares are trading at $25 per share.Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per share.
-If Rockwood finances their expansion by issuing $100 million in debt at 5%,what will Rockwood's cost of equity capital be?

Accepted Answer

A) 11.25% 
B) 10.70% 
C) 12.50% 
D) 12.00% 
A) 11.25% 
B) 10.70% 
C) 12.50% 
D) 12.00%

The following equation: X = rE + rD Can be used to calculate all of the following EXCEPT:

Which of the following statements is FALSE?

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

The following equation: X = rE + rD Can be used to calculate all of the following EXCEPT:

Which of the following statements is FALSE?

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