Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Modigliani and Miller's conclusion verified the common view,which stated that even with perfect capital markets,leverage would affect a firm's value. 
B) We can evaluate the relationship between risk and return more formally by computing the sensitivity of each security's return to the systematic risk of the economy. 
C) Investors in levered equity require a higher expected return to compensate for its increased risk. 
D) Leverage increases the risk of equity even when there is no risk that the firm will default. 
A) Modigliani and Miller's conclusion verified the common view,which stated that even with perfect capital markets,leverage would affect a firm's value. 
B) We can evaluate the relationship between risk and return more formally by computing the sensitivity of each security's return to the systematic risk of the economy. 
C) Investors in levered equity require a higher expected return to compensate for its increased risk. 
D) Leverage increases the risk of equity even when there is no risk that the firm will default.

Question 2

Suppose you are a shareholder in d'Anconia Copper holding 500 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 3

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the value of the firm's levered equity from the project is closest to:

Accepted Answer

A) $0 
B) $10,000 
C) $6000 
D) $8600 
A) $0 
B) $10,000 
C) $6000 
D) $8600

Question 4

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

Accepted Answer

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

Question 5

Consider the following equation:
ΒU =  
ΒE +  
ΒD
The term βD 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 6

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 firm.

Accepted Answer

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

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) The unlevered beta measures the market risk of the firm's business activities,ignoring any additional risk due to leverage. 
B) If a firm holds $1 in cash and has $1 of risk-free debt,then the interest earned on the cash will equal the interest paid on the debt.The cash flows from each source cancel each other,just as if the firm held no cash and no debt. 
C) The unlevered beta measures the market risk of the firm without leverage,which is equivalent to the beta of the firm's assets. 
D) When a firm changes its capital structure without changing its investments,its levered beta will remain unaltered,however,its asset beta will change to reflect the effect of the capital structure change on its risk. 
A) The unlevered beta measures the market risk of the firm's business activities,ignoring any additional risk due to leverage. 
B) If a firm holds $1 in cash and has $1 of risk-free debt,then the interest earned on the cash will equal the interest paid on the debt.The cash flows from each source cancel each other,just as if the firm held no cash and no debt. 
C) The unlevered beta measures the market risk of the firm without leverage,which is equivalent to the beta of the firm's assets. 
D) When a firm changes its capital structure without changing its investments,its levered beta will remain unaltered,however,its asset beta will change to reflect the effect of the capital structure change on its risk.

Question 8

With perfect capital markets,what is the market value of Luther's equity after the share repurchase?

Accepted Answer

A) $15 billion 
B) $10 billion 
C) $25 billion 
D) $20 billion 
A) $15 billion 
B) $10 billion 
C) $25 billion 
D) $20 billion

Question 9

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 10

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 cost of capital for the firm's levered equity is closest to:

Accepted Answer

A) 23% 
B) 25% 
C) 15% 
D) 18% 
A) 23% 
B) 25% 
C) 15% 
D) 18%

Question 11

Based upon the three comparable firms,what asset beta would you recommend using for your firm's new project?

Accepted Answer

@#IMG-DLM& 
% equity is calculated as @#IMG-DLM&

Question 12

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to:

Accepted Answer

A) $6000 
B) $10,000 
C) $0 
D) $33,000 
A) $6000 
B) $10,000 
C) $0 
D) $33,000

Question 13

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 14

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 firm.

Accepted Answer

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

Question 15

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 16

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 17

The unlevered beta for Nod is closest to:

Accepted Answer

A) 1.00 
B) 0.90 
C) 0.95 
D) 1.10 
A) 1.00 
B) 0.90 
C) 0.95 
D) 1.10

Question 18

The unlevered beta for Blinkin is closest to:

Accepted Answer

A) 0.95 
B) 1.10 
C) 1.00 
D) 0.90 
A) 0.95 
B) 1.10 
C) 1.00 
D) 0.90

Question 19

What is a market value balance sheet and how does it differ from a book value balance sheet?

Accepted Answer

One application of MM Proposition I is t

Exam 14: Capital Structure in a Perfect Market

Which of the following statements is FALSE?

Suppose you are a shareholder in d'Anconia Copper holding 500 shares,and you disagree with the decision to lever the firm.You can undo the effect of this decision by:

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the value of the firm's levered equity from the project is closest to:

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

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

Which of the following statements is FALSE?

With perfect capital markets,what is the market value of Luther's equity after the share repurchase?

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:

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 cost of capital for the firm's levered equity is closest to:

Based upon the three comparable firms,what asset beta would you recommend using for your firm's new project?

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to:

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?

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:

The unlevered beta for Nod is closest to:

The unlevered beta for Blinkin is closest to:

What is a market value balance sheet and how does it differ from a book value balance sheet?

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_D in the equation is: