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

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 3

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%.
-Sisyphean Bolder Movers Incorporated has no debt,a total equity capitalization of $50 billion,and a beta of 2.0.Included in Sisyphean's assets are $12 billion in cash and risk-free securities.Calculate Sisyphean's enterprise value and unlevered cost of equity considering the fact that Sisyphean's cash is risk-free.

Accepted Answer

Enterprise value = m

Question 4

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 5

Following the borrowing of $12 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

Use the following information to answer the question(s) below.
Nielson Motors is currently an all equity financed firm. It expects to generate EBIT of $20 million over the next year. Currently Nielson has 8 million shares outstanding and its stock is trading at $20.00 per share. Nielson is considering changing its capital structure by borrowing $50 million at an interest rate of 8% and using the proceeds to repurchase shares. Assume perfect capital markets.
-Which of the following statements is false?

Accepted Answer

A)  The money taken in by the firm as a result of the share issue exactly offsets the dilution of the shares. 
B)  Most analysts prefer to use performance measures and valuation multiples that are based on the firm's earnings before interest has been deducted. 
C)  Because the firm's earnings per share and price-earnings ratio are affected by leverage implies that we can always reliably compare these measures across firms with different capital structures. 
D)  In general, as long as the firm sells the new shares of equity at a fair price, there will be no gain or loss to shareholders associated with the equity issue itself. 
A)  The money taken in by the firm as a result of the share issue exactly offsets the dilution of the shares. 
B)  Most analysts prefer to use performance measures and valuation multiples that are based on the firm's earnings before interest has been deducted. 
C)  Because the firm's earnings per share and price-earnings ratio are affected by leverage implies that we can always reliably compare these measures across firms with different capital structures. 
D)  In general, as long as the firm sells the new shares of equity at a fair price, there will be no gain or loss to shareholders associated with the equity issue itself.

Question 7

Which of the following equations would not be appropriate to use in a firm with risky debt?

Accepted Answer

A)  βE = βU +   (βU - β
D)  
B)  βU = βE+   (βU - β
D)  
C)  βE = βU +   βU 
D)    
A)  βE = βU +   (βU - β
D)  
B)  βU = βE+   (βU - β
D)  
C)  βE = βU +   βU 
D)

Question 8

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

@#IMG-DLM& Given r_E = r_U + @#IMG-DLM& (r_U -

Question 9

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%.
-According to MM Proposition 1,the stock price for With is closest to:

Accepted Answer

A)  $8.00 
B)  $24.00 
C)  $6.00 
D)  $12.00 
A)  $8.00 
B)  $24.00 
C)  $6.00 
D)  $12.00

Question 10

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 11

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 after this transaction takes place is closest to:

Accepted Answer

A)  $800 million 
B)  $900 million 
C)  $1,100 million 
D)  $1,200 million 
A)  $800 million 
B)  $900 million 
C)  $1,100 million 
D)  $1,200 million

Question 12

Equity in a firm with debt is called

Accepted Answer

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

Question 13

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

Question 14

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 strong economy is closest to:

Accepted Answer

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

Question 15

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 Lincoln is closest to:

Accepted Answer

A)  0.95 
B)  1.00 
C)  1.05 
D)  0.90 
A)  0.95 
B)  1.00 
C)  1.05 
D)  0.90

Question 16

The following equation:  
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 17

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 value of a share of d'Anconia Copper will be closest to:

Accepted Answer

A)  $18.33 
B)  $20.00 
C)  $25.00 
D)  $27.50 
A)  $18.33 
B)  $20.00 
C)  $25.00 
D)  $27.50

Question 18

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 $30,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

Accepted Answer

A)  21% 
B)  15% 
C)  20% 
D)  25% 
A)  21% 
B)  15% 
C)  20% 
D)  25%

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%.
-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& @#IMG-DLM& C/F (weak economy)= $90,000 (unlevered

Question 20

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

Which of the following statements is false?

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

Which of the following equations would not be appropriate to use in a firm with risky debt?

Which of the following statements is false?

Equity in a firm with debt is called

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 Lincoln is closest to:

The following equation: Can be used to calculate all of the following except

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

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

Which of the following statements is false?

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

Which of the following equations would not be appropriate to use in a firm with risky debt?

Which of the following statements is false?

Equity in a firm with debt is called

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 Lincoln is closest to:

The following equation: Can be used to calculate all of the following except

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

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