Question 1

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 C

Question 2

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 C

Question 3

Following the borrowing of $12 million and subsequent share repurchase,the equity cost of capital for RC is closest to:

Accepted Answer

A) 12% 
B) 9% 
C) 11.0% 
D) 10% 
A) 12% 
B) 9% 
C) 11.0% 
D) 10% C

Question 4

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 5

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 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.
-Nielson's EPS if they choose not to 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 7

Suppose you are a shareholder in d'Anconia Copper holding 300 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 8

Prior to any borrowing and share repurchase,the equity cost of capital for RC is closest to:

Accepted Answer

A) 11% 
B) 10% 
C) 12% 
D) 9% 
A) 11% 
B) 10% 
C) 12% 
D) 9%

Question 9

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 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

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 12

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 13

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 14

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 15

Which of the following statements is FALSE?

Accepted Answer

A) While debt itself may be cheap,it increases the risk and therefore the cost of capital of the firm's equity. 
B) Although debt does not have a lower cost of capital than equity,we can consider this cost in isolation. 
C) We can use Modigliani and Miller's first proposition to derive an explicit relationship between leverage and the equity cost of capital. 
D) The total market value of the firm's securities is equal to the market value of its assets,whether the firm is unlevered or levered. 
A) While debt itself may be cheap,it increases the risk and therefore the cost of capital of the firm's equity. 
B) Although debt does not have a lower cost of capital than equity,we can consider this cost in isolation. 
C) We can use Modigliani and Miller's first proposition to derive an explicit relationship between leverage and the equity cost of capital. 
D) The total market value of the firm's securities is equal to the market value of its assets,whether the firm is unlevered or levered.

Question 16

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 17

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 18

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 19

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 20

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.

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

Following the borrowing of $12 million and subsequent share repurchase,the equity cost of capital for RC 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:

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 you are a shareholder in d'Anconia Copper holding 300 shares,and you disagree with the decision to lever the firm.You can undo the effect of this decision by

Prior to any borrowing and share repurchase,the equity cost of capital for RC 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 $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:

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

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:

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

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?

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

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

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

Following the borrowing of $12 million and subsequent share repurchase,the equity cost of capital for RC 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:

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 you are a shareholder in d'Anconia Copper holding 300 shares,and you disagree with the decision to lever the firm.You can undo the effect of this decision by

Prior to any borrowing and share repurchase,the equity cost of capital for RC 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 $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:

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

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:

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

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?

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

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