Question 1

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

Question 2

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 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 D

Question 3

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. D

Question 4

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 5

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.The market value of Luther's non-cash assets is closest to:

Accepted Answer

A)  $22 billion 
B)  $20 billion 
C)  $25 billion 
D)  $18 billion 
A)  $22 billion 
B)  $20 billion 
C)  $25 billion 
D)  $18 billion

Question 6

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 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 7

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 8

Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the market value of its equity just after the dividend is paid would be closest to:

Accepted Answer

A)  $0 million 
B)  $150 million 
C)  $250 million 
D)  $400 million 
A)  $0 million 
B)  $150 million 
C)  $250 million 
D)  $400 million

Question 9

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 10

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 11

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 12

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

Accepted Answer

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

Question 13

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 14

Which of the following statements is FALSE?

Accepted Answer

A)  Investors can alter the leverage choice of the firm to suit their personal tastes either by borrowing and reducing leverage or by holding bonds and adding more leverage. 
B)  On the market value balance sheet the total value of all securities issued by the firm must equal the total value of the firm's assets. 
C)  The market value balance sheet captures the idea that value is created by a firm's choice of assets and investments. 
D)  One application of MM Proposition I is the useful device known as the market value balance sheet of the firm. 
A)  Investors can alter the leverage choice of the firm to suit their personal tastes either by borrowing and reducing leverage or by holding bonds and adding more leverage. 
B)  On the market value balance sheet the total value of all securities issued by the firm must equal the total value of the firm's assets. 
C)  The market value balance sheet captures the idea that value is created by a firm's choice of assets and investments. 
D)  One application of MM Proposition I is the useful device known as the market value balance sheet of the firm.

Question 15

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 16

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 17

Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Taggart borrows until they achieved a debt -to-equity ratio of 50%,then Rearden's levered cost of equity would be closest to:

Accepted Answer

A)  10.0% 
B)  12.0% 
C)  15.0% 
D)  16.0% 
A)  10.0% 
B)  12.0% 
C)  15.0% 
D)  16.0%

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 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 19

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.
-Nielson's EPS if they change their capital structure is closest to:

Accepted Answer

A)  $2.00 
B)  $2.30 
C)  $2.50 
D)  $2.90 
A)  $2.00 
B)  $2.30 
C)  $2.50 
D)  $2.90

Question 20

Suppose you own 10% of the equity of With.What is another portfolio you could hold that would provide you with the same exact cash flows?

Accepted Answer

The cash flows for a 10% ownership stake

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.The market value of Luther's non-cash assets 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 Blinkin is closest to:

Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the market value of its equity just after the dividend is paid would be closest to:

At the conclusion of this transaction,the value of a share of d'Anconia Copper will be closest to:

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

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

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:

Which of the following statements is FALSE?

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:

Which of the following statements is FALSE?

Suppose you own 10% of the equity of With.What is another portfolio you could hold that would provide you with the same exact cash flows?

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

Filters

Exam 14: Capital Structure in a Perfect Market

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.The market value of Luther's non-cash assets 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 Blinkin is closest to:

Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the market value of its equity just after the dividend is paid would be closest to:

At the conclusion of this transaction,the value of a share of d'Anconia Copper will be closest to:

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

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

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:

Which of the following statements is FALSE?

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:

Which of the following statements is FALSE?

Suppose you own 10% of the equity of With.What is another portfolio you could hold that would provide you with the same exact cash flows?

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

Filters