Question 1

Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital markets?

Accepted Answer

A) All investors hold the efficient portfolio of assets. 
B) There are no taxes,transaction costs,or issuance costs associated with security trading. 
C) A firm's financing decisions do not change the cash flows generated by its investments,nor do they reveal new information about them. 
D) Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows. 
A) All investors hold the efficient portfolio of assets. 
B) There are no taxes,transaction costs,or issuance costs associated with security trading. 
C) A firm's financing decisions do not change the cash flows generated by its investments,nor do they reveal new information about them. 
D) Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows.

Question 2

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 3

The following equation:
X =  
RE +  
RD
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 4

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 Rearden 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 5

What is the conservation of value principle?

Accepted Answer

With perfect capital markets,f

Question 6

The market capitalization of d'Anconia Copper before this transaction takes place is closest to:

Accepted Answer

A) $800 million 
B) $900 million 
C) $1100 million 
D) $1200 million 
A) $800 million 
B) $900 million 
C) $1100 million 
D) $1200 million

Question 7

Suppose that you borrow $60,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

Accepted Answer

A) 45% 
B) 30% 
C) 25% 
D) 35% 
A) 45% 
B) 30% 
C) 25% 
D) 35%

Question 8

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 9

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 10

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

Accepted Answer

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

Question 11

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 12

With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?

Accepted Answer

A) $25 
B) $24 
C) $15 
D) $20 
A) $25 
B) $24 
C) $15 
D) $20

Question 13

The NPV for this project is closest to:

Accepted Answer

A) $6250 
B) $14,100 
C) $10,000 
D) $18,600 
A) $6250 
B) $14,100 
C) $10,000 
D) $18,600

Question 14

Suppose you are a shareholder in Galt industries holding 600 shares,and you disagree with this decision to delever the firm.You can undo the effect of this decision by:

Accepted Answer

A) Borrowing $6000 and buying 240 shares of stock 
B) Selling 240 shares of stock and lending $6000 
C) Borrowing $9000 and buying 360 shares of stock 
D) Selling 360 shares of stock and lending $9000 
A) Borrowing $6000 and buying 240 shares of stock 
B) Selling 240 shares of stock and lending $6000 
C) Borrowing $9000 and buying 360 shares of stock 
D) Selling 360 shares of stock and lending $9000

Question 15

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 16

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 17

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 18

The market capitalization of d'Anconia Copper after this transaction takes place is closest to:

Accepted Answer

A) $800 million 
B) $900 million 
C) $1100 million 
D) $1200 million 
A) $800 million 
B) $900 million 
C) $1100 million 
D) $1200 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

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)/

Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital markets?

Which of the following statements is FALSE?

The following equation: X = R_E + R_D Can be used to calculate all of the following EXCEPT:

What is the conservation of value principle?

The market capitalization of d'Anconia Copper before this transaction takes place is closest to:

Suppose that you borrow $60,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

Which of the following statements is FALSE?

Considering the fact that Luther's Cash is risk-free,Luther's unlevered beta is closest to:

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

Which of the following statements is FALSE?

With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?

The NPV for this project is closest to:

Suppose you are a shareholder in Galt industries holding 600 shares,and you disagree with this decision to delever the firm.You can undo the effect of this decision by:

The number of shares that Galt must issue is closest to:

Consider the following equation: Β_U = Β_E + Β_D The term β_D in the equation is:

Galt's WACC is closest to:

The market capitalization of d'Anconia Copper after this transaction takes place is closest to:

Show mathematically that the stock price of RC won't change following the debt issuance and share repurchase.

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 is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital markets?

Which of the following statements is FALSE?

The following equation: X = RE + RD Can be used to calculate all of the following EXCEPT:

What is the conservation of value principle?

The market capitalization of d'Anconia Copper before this transaction takes place is closest to:

Suppose that you borrow $60,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

Which of the following statements is FALSE?

Considering the fact that Luther's Cash is risk-free,Luther's unlevered beta is closest to:

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

Which of the following statements is FALSE?

With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?

The NPV for this project is closest to:

Suppose you are a shareholder in Galt industries holding 600 shares,and you disagree with this decision to delever the firm.You can undo the effect of this decision by:

The number of shares that Galt must issue is closest to:

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

Galt's WACC is closest to:

The market capitalization of d'Anconia Copper after this transaction takes place is closest to:

Show mathematically that the stock price of RC won't change following the debt issuance and share repurchase.

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

The following equation: X = R_E + R_D Can be used to calculate all of the following EXCEPT:

Consider the following equation: Β_U = Β_E + Β_D The term β_D in the equation is: