Corporate Finance
If an investor buys a portion (X) of the equity of a levered firm, then his/her payoff is:
(X) * (profits-interest)
Which of the following features increases the value of a call option?
1) A high interest rate 2) A long time to maturity 3) A higher volatility of the underlying stock price
The following statements regarding NPV and the rate of return rule are true:
1) Accept a project if its NPV > 0 2) Reject a project if its NPV < 0 3) Accept a project if its rate of return > opportunity cost of capital
An investor can create the effect of leverage on his/her account by:
1) Buying equity of an unlevered firm 2) Borrowing on his/her account
Capital structure is irrelevant if:
1) Capital markets are efficient 2) Each investor can borrow/lend on the same terms as the firm 3) There are no tax benefits to debt
A firm's cost of equity can be estimated using the:
1) Discounted cash-flow (DCM) approach 2) Capital asset pricing model (CAPM) 3) Arbitrage pricing theory (APT)
Firms can pay cash out to their shareholders in the following ways:
1) Dividends 2) Repurchase of stock
Which of the following investors would be happy to see the stock price rise sharply?
1) Investor who owns the stock and a put option 2) Investor who has sold a put option and bought a call option
The three factors in the Three-Factor Model are:
1) Market factor 2) Size factor 3) Book-to-market factor
MM Proposition II (assuming no bankruptcy) states:
1) The expected return on equity is positively related to leverage 2) The required return on equity is a linear function of the firm's debt to equity ratio 3) The risk to equity increases with leverage
If a firm uses the same company cost of capital for evaluating all projects, which situation will likely occur:
1) The firm will reject good low risk projects 2) The firm will accept poor high risk projects 3) The firm will correctly accept projects with average risk
Greenmail refers to the practice of a company purchasing its stock, usually at a high price from:
A hostile shareholder who threatens to take over the firm
Which of the following portfolios have the least risk? A) Treasury Bill B) Portfolio of long-term US Government Bonds C) Portfolio of US common stocks D) Portfolio of AAA-rated corporate bonds
A) - Portfolio of Treasury Bills
MM Proposition I with corporate taxes states:
A) Capital structure can affect firm value by an amount that is equal to the present value of the interest tax shield B) By raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value
Which of the following is NOT a sensible reason for a firm to rely on internal funds:
A) Equity issues are generally expensive B) A new bond issue may drive the firm's debt ratio too high C) Financial markets interpret the issuance of equity unfavorably
Which of these dates occurs last in time: A) Payment date B) Ex-dividend date C) Record date D) Dividend declaration date
A) Payment date
Costs associated with the conflicts of interest between the bondholders and the shareholders of a corporation are called:
Agency Costs
Strong form market efficiency states that the market incorporates all information in the stock price. Strong form efficiency implies that:
An insider or corporate officer can not outperform the market by trading on the inside information
The company cost of capital is the appropriate discount rate for a firm's:
Average-risk projects
Dividends are decided by:
Board of Directors
Suppose you buy a call and lend the present value of its exercise price. You could match the payoffs of this strategy by:
Buying the underlying stock and buying a put
In order to find the present value of the tax shields provided by debt, the discount rate used is the:
Cost of Debt
The main disadvantage of organizing a business as a corporation in the United States is:
Double taxation
The following are agency problems in capital budgeting:
Empire Building Entrenching investments Avoiding risks
An European options gives its owner the right to exercise the option at any time before expiration
False
Inclusion of restrictions in a bond contract leads to:
Higher agency costs
The following are some of the shortcomings of the IRR method EXCEPT:
IRR is conceptually easy to communicate
If a bond's duration is 10 years and the interest rate goes down by 0.75%, then the price of the bond:
Increases by 7.5%
The main advantage of debt financing for a firm is:
Interest expenses are tax deductible
The higher the underlying stock price:
Lower the put price
The "beta" is a measure of:
Market risk
Minimizing the weighted average cost of capital (WACC) is the same as maximizing:
Market value of the firm
Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to:
Meet interest and principle payments, which if not met can put the company into finacial distress
If a bond is junior or subordinated, it:
Must give preference to senior creditors in the event of default
When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, etc., it is called:
Private Placement
Which of the following statements best describes shelf regulation?
Registration of the sale of securities in the primary market
A new public entity issue from a company with public equity previously outstanding is called:
Seasoned Equity Offering (SEO)
What signal is sent to the market when a firm decides to issue new stock to raise capital?
Stock price is too high
Assuming that bonds are sold at a fair price, the benefits from the interest tax shield go to the:
Stockholders of the firm
He can "beat the market" by short selling the stock the of the firm that will be sued. This finding is in violation of:
Strong form market efficiency
Costs incurred as a result of past, irrevocable decisions and irrelevant to future decisions are called:
Sunk costs
According to the portfolio-based asset pricing models, what risks are you compensated for taking on?
Systematic risks
Which of the following investment rules does not use the time value of money concept?
The payback period
A call option gives its owner the right to buy stock at a fixed strike price during a specific period of time
True
Generally, IPO's are:
Underpriced
MM's Proposition I corrected for the inclusion of corporate income taxes is expressed as:
VL = Vu + (T)(D)
Generally which is the following is true? (Beta)
bD<bA<bE