Fi516 Advanced Finance

Study Guide for Final Exam 1. (TCO B) Which of the pursuance statements concerning the MM extension with growth is NOT adjust? (a) The tax shields should be discounted at the unlevered constitute of equity. (b) The think of of a growing tax shield is great than the value of a constant tax shield. (c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MMs sure (with tax) assumptions. (d) For a given D/S, the WACC is greater than the WACC under MMs original (with tax) assumptions. e) The positive value of the menage is indep revokeent of the amount of debt it handlings. (Points 20) 2. (TCO D) Which of the avocation statements is most CORRECT? (a) In a private placement, securities be sold to private (individual) investors instead than to institutions. (b) Private placements occur most frequently with stocks, but bonds can similarly be sold in a private placement. (c) Private placements are convenient for issuers, but the convenience is offset by higher floatation costs. (d) The SEC requires that all private placements be handled by a registered enthronisation banker. e) Private placements can generally bring in funds meteoric than is the case with public offerings. (Points 20) 3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential engage for a transport with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan tell would be 10%, and the loan would be amortized everywhere the trucks 4-year life. The loan founderments would be made at the end of sepa croply year. The truck allow for be used for 4 years, at the end of which fourth dimension it will be sold at an estimated residual value of $10,000.If DTC buys the truck, its aft(prenominal) tax coin flows would be the following (Year 1) 6,339 (Year 2) -4,764 (Year 3)-9,943 (Year 4) -5,640 all occurring at the end of respective years. The betroth terms, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTCs tax pass judgment is 40%. Should the firm lease or buy? (a) $849 (b) $896 (c) $945 (d) $997 (e) $1,047 (Points 20) 4. (TCO I) gauge 90-day investments in Britain have a 6% annualized return and a 1. 5% quarterly (90-day) return. In the U. S. 90-day investments of similar find have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British tucker out equals $1. 65. If interest rate equationity holds, what is the spot exchange rate? (a) 1 pound = $1. 8000 (b) 1 pound = $1. 6582 (c) 1 pound = $1. 0000 (d) 1 pound = $0. 8500 (e) 1 pound = $0. 6031 (Points 20) 1. (TCO C) D. Paul Inc. forecasts a superior budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000.If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? Net Income Payout (a) $898,750 55. 63% (b) $943,688 58. 41% (c) $990,872 61. 43% (d) $1,040,415 64. 40% (e) $1,092,436 67. 62% (Points 20) 2. (TCO F) warren Corporations stock make dos for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into maven share of stock at an exercise price of $47.The firms consecutive bonds yield 10%. Each warrant is expected to have a market value of $2. 00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par? (a) 7. 83% (b) 8. 24% (c) 8. 65% (d) 9. 08% (e) 9. 54% (Points 20) 3. (TCO B) Which of the following statements is CORRECT, holding other things constant? (a) Firms whose assets are relatively liquid scarper to have relatively low bankruptcy costs, hence they tend to use relatively little debt. b) An increase in the personal tax rate is possi ble to increase the debt ratio of the average corporation. (c) If changes in the bankruptcy polity make bankruptcy less(prenominal) costly to corporations, then this would likely write out the debt ratio of the average corporation. (d) An increase in the companys degree of operating leverage is likely to encourage a company to use more debt in its capital structure. (e) An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure. (Points 20) 4. TCO G) Chapter 7 of the Bankruptcy Act is designed to do which of the following? (a) cheer shareholders against creditors. (b) Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments. (c) Ensure that the firm is viable after rising from bankruptcy. (d) Allow the firm to negotiate with each creditor individually. (e) Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow i nsolvent debtors to discharge all of their obligations and to number one over unhampered by a burden of prior debt. . (TCO I) Suppose one British pound can purchase 1. 82 U. S. dollars at present in the foreign exchange market, and currency forecasters predict that the U. S. dollar will depreciate by 12. 0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days? (a) 1. 12 (b) 1. 63 (c) 1. 82 (d) 2. 04 (e) 3. 64 (Points 20) 2. (TCO H) Which of the following statements most valuing a firm using the APV approach is most CORRECT? (a) The value of trading operations is reason by discounting the aspect value, the tax shields, and the free cash flows at the cost of equity. b) The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. (c) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows beforehand the horizon date at t he unlevered cost of equity. (d) The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity. (e) The APV approach stands for the accounting pre-valuation approach. (Points 20) 3. (TCO A) Which of the following statements is CORRECT? a) Put options give investors the unspoilt to buy a stock at a certain key price before a specified date. (b) Call options give investors the effective to sell a stock at a certain return price before a specified date. (c) Options typically sell for less than their exercise value. (d) LEAPS are very short-term options that were created relatively recently and in a flash trade in the market. (e) An option holder is not entitled to birth dividends unless he or she exercises their option before the stock goes ex dividend. (Points 20) 4. (TCO F) A swap is a method used to reduce fiscal risk.Which of the following statements about swaps, if any, is NOT CORRECT? (a) A swap involves the exchange of cas h payment obligations. (b) The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, opine dollars and pounds. (c) Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties. (d) A problem with swaps is that no standardized contracts exist, which has prevented the development of a collateral market. (e) A company can swap fixed interest payments for drift interest payments. (Points 20)