Question 1

Galt's asset beta (ie 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 2

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 cash flow that equity holders will receive in one year in a weak economy is closest to:

Accepted Answer

A) $90,000 
B) $0 
C) $50,000 
D) $48,000 
A) $90,000 
B) $0 
C) $50,000 
D) $48,000

Question 3

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 4

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%

Question 5

Following the borrowing of $12 million and subsequent share repurchase,the number of shares that RC will have outstanding is closest to:

Accepted Answer

A) 4.0 million 
B) 6.0 million 
C) 4.9 million 
D) 4.5 million 
A) 4.0 million 
B) 6.0 million 
C) 4.9 million 
D) 4.5 million

Question 6

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 cash flow that equity holders will receive in one year in a strong economy is closest to:

Accepted Answer

A) $117,000 
B) $75,000 
C) $50,000 
D) $0 
A) $117,000 
B) $75,000 
C) $50,000 
D) $0

Question 7

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 new stock,what will Rockwood's cost of equity capital be?

Accepted Answer

A) 12% 
B) 15% 
C) 8% 
D) 10% 
A) 12% 
B) 15% 
C) 8% 
D) 10%

Question 8

Consider the following equation:
ΒU =  
ΒE +  
ΒD
The term βU in the equation is:

Accepted Answer

A) the same as the beta of the firm's assets. 
B) the required return on the firm's equity. 
C) the proportion of the firm financed with equity. 
D) equal to zero if the firm's debt is riskless. 
A) the same as the beta of the firm's assets. 
B) the required return on the firm's equity. 
C) the proportion of the firm financed with equity. 
D) equal to zero if the firm's debt is riskless.

Question 9

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,how much do you need to borrow 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?

Accepted Answer

A) $10,000 
B) $5000 
C) $2500 
D) $0 
A) $10,000 
B) $5000 
C) $2500 
D) $0

Question 10

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 11

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 12

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 13

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 14

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 15

Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.

Accepted Answer

First,since the project is already annou

Question 16

Consider the following equation:
ΒU =  
ΒE +  
ΒD
The term  
In the equation is:

Accepted Answer

A) the required return on the firm's equity. 
B) the same as the beta of the firm's assets. 
C) equal to zero if the firm's debt is riskless. 
D) the proportion of the firm financed with equity. 
A) the required return on the firm's equity. 
B) the same as the beta of the firm's assets. 
C) equal to zero if the firm's debt is riskless. 
D) the proportion of the firm financed with equity.

Question 17

Following the borrowing of $12 million and subsequent share repurchase,the value of a share for RC is closest to:

Accepted Answer

A) $14.00 
B) $13.20 
C) $12.00 
D) $10.80 
A) $14.00 
B) $13.20 
C) $12.00 
D) $10.80

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.
-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 19

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 20

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.
-The market value of Luther's non-cash assets is closest to:

Accepted Answer

A) $20 billion 
B) $19 billion 
C) $25 billion 
D) $24 billion 
A) $20 billion 
B) $19 billion 
C) $25 billion 
D) $24 billion

Exam 14: Capital Structure in a Perfect Market

Galt's asset beta (ie the beta of its operating assets)is closest to:

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 cash flow that equity holders will receive in one year in a weak economy is closest to:

Equity in a firm with no debt is called:

If Rockwood finances their expansion by issuing $100 million in debt at 5%,what will Rockwood's cost of equity capital be?

Following the borrowing of $12 million and subsequent share repurchase,the number of shares that RC will have outstanding is closest to:

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 cash flow that equity holders will receive in one year in a strong economy is closest to:

Consider the following equation: ΒU = ΒE + ΒD The term βU in the equation is:

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

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

Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.

Consider the following equation: ΒU = ΒE + ΒD The term In the equation is:

Following the borrowing of $12 million and subsequent share repurchase,the value of a share for RC is closest to:

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

Consider the following equation: Β_U = Β_E + Β_D The term β_U in the equation is:

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

Consider the following equation: Β_U = Β_E + Β_D The term In the equation is: