Question 1

Following the borrowing of $12 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 C

Question 2

Use the information for the question(s) below.
You are evaluating a new project and need an estimate for your project's beta. You have identified the following information about three firms with comparable projects:
  
-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 D

Question 3

Consider the following equation:  
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. D

Question 4

Which of the following statements is false?

Accepted Answer

A)  When a firm issues new shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalization. 
B)  MM Proposition I applies to capital structure decisions made at any time during the life of the firm. 
C)  By choosing positive-NPV projects that are worth more than their initial investment, the firm can enhance its value. 
D)  Holding fixed the cash flows generated by the firm's assets, however, the choice of capital structure does not change the value of the firm. 
A)  When a firm issues new shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalization. 
B)  MM Proposition I applies to capital structure decisions made at any time during the life of the firm. 
C)  By choosing positive-NPV projects that are worth more than their initial investment, the firm can enhance its value. 
D)  Holding fixed the cash flows generated by the firm's assets, however, the choice of capital structure does not change the value of the firm.

Question 5

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 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 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)  $6,000 
B)  $10,000 
C)  $0 
D)  $33,000 
A)  $6,000 
B)  $10,000 
C)  $0 
D)  $33,000

Question 7

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 8

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 9

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 10

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 11

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 dollars in debt at an interest rate of 5%.
-Assume that MM's perfect capital markets 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 With stock.Using homemade (un)leverage you invest enough at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock? The number of shares of With stock you purchased is closest to:

Accepted Answer

A)  100 
B)  425 
C)  1650 
D)  825 
A)  100 
B)  425 
C)  1650 
D)  825

Question 12

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

Question 13

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 cash 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...

Question 14

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 15

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 are financing through equity alone and financing through a combination of debt and equity. 
C)  The project's NPV represents the value to the new investors of the firm created by the project. 
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 are financing through equity alone and financing through a combination of debt and equity. 
C)  The project's NPV represents the value to the new investors of the firm created by the project. 
D)  When corporations raise funds from outside investors, they must choose which type of security to issue.

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 $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 17

Which of the following statements is false?

Accepted Answer

A)  As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. 
B)  If securities are fairly priced, then buying or selling securities has an NPV of zero and, therefore, should not change the value of a firm. 
C)  The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front. 
D)  An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio. 
A)  As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. 
B)  If securities are fairly priced, then buying or selling securities has an NPV of zero and, therefore, should not change the value of a firm. 
C)  The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front. 
D)  An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio.

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.
-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 19

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 value of the firm's levered equity from the project is closest to:

Accepted Answer

A)  $0 
B)  $10,000 
C)  $6,000 
D)  $8,600 
A)  $0 
B)  $10,000 
C)  $6,000 
D)  $8,600

Question 20

Which of the following statements is false?

Accepted Answer

A)  With no debt, the WACC is equal to the unlevered equity cost of capital. 
B)  With perfect capital markets, a firm's WACC is dependent of its capital structure and is equal to its equity cost of capital only the firm it is unlevered. 
C)  As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
D)  Although debt has a lower cost of capital than equity, leverage does not lower a firm's WACC. 
A)  With no debt, the WACC is equal to the unlevered equity cost of capital. 
B)  With perfect capital markets, a firm's WACC is dependent of its capital structure and is equal to its equity cost of capital only the firm it is unlevered. 
C)  As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
D)  Although debt has a lower cost of capital than equity, leverage does not lower a firm's WACC.

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

Use the information for the question(s) below. You are evaluating a new project and need an estimate for your project's beta. You have identified the following information about three firms with comparable projects: -The unlevered beta for Nod is closest to:

Consider the following equation: The term In the equation is

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?

Which of the following statements is false?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Bonds

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

The Capital Asset Pricing Model

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

The Mechanics of 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

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

Use the information for the question(s) below. You are evaluating a new project and need an estimate for your project's beta. You have identified the following information about three firms with comparable projects: -The unlevered beta for Nod is closest to:

Consider the following equation: The term In the equation is

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?

Which of the following statements is false?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Bonds

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

The Capital Asset Pricing Model

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

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters