Question 1

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

Question 2

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%

Question 3

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.

Question 4

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%.
-The NPV for this project is closest to:

Accepted Answer

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

Question 5

After the repurchase how many shares will Luther have outstanding?

Accepted Answer

A) 0.75 billion 
B) 1.0 billion 
C) 1.1 billion 
D) 1.2 billion

Question 6

At the conclusion of this transaction,the number of shares that d'Anconia Copper will have outstanding is closest to:

Accepted Answer

A) 5 million 
B) 15 million 
C) 20 million 
D) 40 million

Question 7

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

Question 8

Suppose you own 10% of the equity of Without.What is another portfolio you could hold that would provide you with the same exact cash flows?

Accepted Answer

The answer of Suppose you own 10% of the equity...

Question 9

Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?

Accepted Answer

The answer of Suppose that to raise the funds for...

Question 10

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.

Question 11

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

Question 12

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

Question 13

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%

Question 14

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.

Question 15

The beginning of the modern theory of finance was marked by:

Accepted Answer

A) the approach used by Modigliani and Miller. 
B) the approach used by John and Williams. 
C) the approach taken by Berk and DeMarzo. 
D) the approach taken by Dan Harris.

Question 16

Louie's Truck Repair has assets with a market value of $8000.The company has three types of securities: equity,$2500 of debt,and 100 warrants that are fairly priced at $20 each.What is the value of Louie's equity?

Accepted Answer

A) $5430 
B) $12,500 
C) $10,500 
D) $3500

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) Since the publication of their original paper,Modigliani and Miller's ideas have greatly influenced finance research and practice. 
B) Proposition I was one of the first arguments to show that the Law of One Price could have strong implications for security prices and firm values in a competitive market;it marks the beginning of the modern theory of corporate finance. 
C) The conservation of value principle applies only to questions of debt versus equity
Or capital structure. 
D) The conservation of value principle for financial markets states that with perfect capital markets,financial transactions neither add nor destroy value,but instead represent a repackaging of risk (and therefore return).

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

Question 19

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 answer of Suppose you own 10% of the equity...

Question 20

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.

Exam 14: Capital Structure in a Perfect Market

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:

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

Which of the following statements is FALSE?

After the repurchase how many shares will Luther have outstanding?

At the conclusion of this transaction,the number of shares that d'Anconia Copper will have outstanding 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 Lincoln is closest to:

Suppose you own 10% of the equity of Without.What is another portfolio you could hold that would provide you with the same exact cash flows?

Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?

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

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

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

Which of the following statements is FALSE?

The beginning of the modern theory of finance was marked by:

Louie's Truck Repair has assets with a market value of $8000.The company has three types of securities: equity,$2500 of debt,and 100 warrants that are fairly priced at $20 each.What is the value of Louie's equity?

Which of the following statements is FALSE?

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

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?

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