Question 1

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.Construct a table detailing the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.

Accepted Answer

The answer of Two separate firms are considering investing in...

Question 2

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase how many shares will Luther have outstanding?

Accepted Answer

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

Question 3

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) $6000 
B) $10,000 
C) $0 
D) $33,000

Question 4

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 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 expected returns for both the levered and unlevered firm.

Accepted Answer

The answer of Two separate firms are considering investing in...

Question 6

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) $6000 
C) $33,000 
D) $10,000

Question 7

With perfect capital markets,what is the market value of Luther's equity after the share repurchase?

Accepted Answer

A) $15 billion 
B) $10 billion 
C) $25 billion 
D) $20 billion

Question 8

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 9

Which of the following statements is FALSE?

Accepted Answer

A) With no debt,the WACC is equal to the unlevered equity cost of capital. 
B) With perfect capital markets,a firm's WACC is dependent of its capital structure and is equal to its equity cost of capital only the firm it is unlevered. 
C) As the firm borrows at the low cost of capital for debt,its equity cost of capital rises,but the net effect is that the firm's WACC is unchanged. 
D) Although debt has a lower cost of capital than equity,leverage does not lower a firm's WACC.

Question 10

Following the borrowing of $12 million and subsequent share repurchase,the expected earnings per share for RC is closest to:

Accepted Answer

A) $1.32 
B) $1.44 
C) $1.40 
D) $1.20

Question 11

Equity in a firm with debt is called:

Accepted Answer

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

Question 12

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

Question 13

Suppose that you borrow $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%

Question 14

If Rockwood finances their expansion by issuing $100 million in debt at 5%,what will Rockwood's cost of equity capital be?

Accepted Answer

A) 11.25% 
B) 10.70% 
C) 12.50% 
D) 12.00%

Question 15

If Rockwood finances their expansion by issuing new stock,what will Rockwood's cost of equity capital be?

Accepted Answer

A) 12% 
B) 15% 
C) 8% 
D) 10%

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,how much do you need to borrow 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?

Accepted Answer

A) $10,000 
B) $5000 
C) $2500 
D) $0

Question 17

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

The answer of Suppose that you borrow only $45,000 in...

Question 18

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 With stock.Using homemade (un)leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?

Accepted Answer

A) $5000 
B) $0 
C) $2500 
D) $4000

Question 19

The market value of Luther's non-cash assets is closest to:

Accepted Answer

A) $20 billion 
B) $19 billion 
C) $25 billion 
D) $24 billion

Question 20

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.

Exam 14: Capital Structure in a Perfect Market

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase how many shares will Luther have outstanding?

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:

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?

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:

With perfect capital markets,what is the market value of Luther's equity after the share repurchase?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Following the borrowing of $12 million and subsequent share repurchase,the expected earnings per share for RC is closest to:

Equity in a firm with debt is called:

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

If Rockwood finances their expansion by issuing $100 million in debt at 5%,what will Rockwood's cost of equity capital be?

If Rockwood finances their expansion by issuing new stock,what will Rockwood's cost of equity capital be?

Suppose that you borrow only $45,000 in financing the project.According to MM proposition II,calculate the firm's equity cost of capital.

The market value of Luther's non-cash assets is closest to:

Which of the following statements is FALSE?