Qual
Which ONE of the following statements is TRUE? a.European options are traded in Europe while American options are traded in the U.S .b.The time value of an option increases as it gets closer to expiration. c.The value of an in the money option increases as it gets closer to expiration. d.The exercise value of an option will be equal to its strike price when the option expires .e.The exercise value of an option will be equal to its price when the option expires.
.e The exercise value of an option will be equal to its price when the option expires.
16. Which one of the following statements about dividend policies is FALSE? . a *Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect. b. In today's tax environment, gains through stock repurchases and dividend payments are taxed at the same rate. c. One advantage of dividend reinvestment plans is that they allow shareholders to maintain a position in a company with minimal trading. d. One key disadvantage of a residual dividend policy is that it makes it hard for a company to follow a stable dividend policy. e. The clientele effect suggests that companies should follow a stable dividend policy.
a *Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.
Which ONE of the following statements is TRUE? a.If the firm's tax rate declines, then its WACC will increase because its after tax cost of debt increases. b.If the firm's tax rate declines, its higher net profit will cause its WACC to increase. c.If a firm's tax rate declines, then the YTM on its debt will decrease. d.If a firm's tax rate declines, then the after-tax value of its dividends will increase, increasing the firm's value. e.If a firm's tax rate declines, then its preferred stock will become more valuable relative to its common stock, driving down the firm's percentage of equity in its capital structure.
a .If the firm's tax rate declines, then its WACC will increase because its after tax cost of debt increases.
Which of the following would be most likely to lead to an increase in a firm's dividend payout ratio? a. *Its earnings become more stable. b. Its access to the capital markets becomes more limited. c. Its accounts receivable increase due to a change in its credit policy. d. Its stock price has slid over the last year.e. Its R&D efforts pay off, and it now has more high-return investment opportunities.
a. *Its earnings become more stable.
Which ONE of the following statements is FALSE? a. Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. b. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. d. It is possible for a firm to go public and yet not raise any additional new capital. e.When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."
a. Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
The cost of capital is 10%. Consider the following pair of projects A and B:Year: 0 1 2 3CFA -1000 900 400 100CFB - 500 500 200 100Which ONE of the following statements is FALSE? a. If Projects A and B are independent, you would accept only Project A .b. The NPV of Project A is greater than the NPV of Project B .c. The IRR of Project B is greater than the IRR of Project A. d. If Projects A and B are mutually exclusive, you would accept only Project B .e. Project A adds the most value to the company.
a. If Projects A and B are independent, you would accept only Project A.
Which one of the following statements is TRUE? a.*If the stock price remains constant, the price of an in the money call will decrease as it approaches expiration. b.The time value of a call option is the future value of the exercise price using the risk free rate and compounding until maturity .c.The time value of a put option is the future value of the exercise price using the risk free rate and compounding until maturity. d.If two puts on a stock have the same exercise price, then the put with the shorter maturity will be more expensive. e.If the stock price remains constant, the price of an out of the money put will increase as it approaches expiration.
a.*If the stock price remains constant, the price of an in the money call will decrease as it approaches expiration.
Which of the following statements is CORRECT? a. The capital structure that maximizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price. b. *Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should decrease their use of debt. c. The capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share .d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC. e. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.
b. *Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should decrease their use of debt.
Referring to the NPV profile graph above, if the cost of capital is 12% and the projects are mutually exclusive, then which project or projects should be accepted? a. Can't tell from the available information b. Project A c. Project B d. Neither Project A nor Be. Projects A and B
b. Project A
Which one of the following statements is TRUE about IPOs and investment banking? a. Costs are lower in an underwritten IPO because it is insured. b. The risk to the investment banker is greater in an underwritten issue because the banker, rather than the issuing company, bears the risk that the offering will not sell out. c. An IPO is said to be fully-subscribed if all of the company's outstanding shares are listed in the IPO and they are all successfully sold to the public. d. A company may have multiple classes of stock with different voting rights as long as the per share dividend for each class is proportional to the number of votes the share has. e.When an IPO takes place, the number of shares outstanding decreases by the number of shares sold in the offering.
b. The risk to the investment banker is greater in an underwritten issue because the banker, rather than the issuing company, bears the risk that the offering will not sell out.
Which ONE of the following statements is TRUE? a. When viewing the levered firm with risky debt as an option, the debt holders have an option to foreclose on the firm. b. When viewing the levered firm with risky debt as an option, the value of the equity is the value of the option and the face value of the debt is the exercise price. c. When viewing the levered firm with risky debt as an option, the face value of the debt is the value of the option and the value of the equity is the exercise price. d. When viewing the levered firm with risky debt as an option, the current value of the debt is the value of the option and the face value of the debt is the exercise price. e.When viewing the levered firm with risky debt as an option, the underlying asset is the value of the equity.
b. When viewing the levered firm with risky debt as an option, the value of the equity is the value of the option and the face value of the debt is the exercise price.
Which ONE of the following statements is TRUE? a.The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share .b.All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio .c.Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC. d.Since debt is cheaper than equity, increasing a company's debt ratio will always reduce its WACC .e.When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase.
b.All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio.
22. Cash flows from which of the following would NOT impact the NPV analysis of a project? a.The space the project will go in is currently being rented out for storage for $2000 per month. If the project is accepted the rental will stop. b.Corporate policy is to allocate corporate overhead among old and new projects. The allocation charge would be $1,000 per month. Total corporate overhead will not change if the project is accepted. c.The new product associated with the project will displace sales of an existing product. d.The new product associated with the project will reinforce the sales of an existing product. e.An important component required for manufacturing the new product is peanut butter. This peanut butter will be purchased from Kroger.
b.Corporate policy is to allocate corporate overhead among old and new projects. The allocation charge would be $1,000 per month. Total corporate overhead will not change if the project is accepted.
Suppose that at the end of year 5, when the bonds above become callable (and how have 15 years to maturity), the yield to maturity is 6.5%. Which ONE of the following statements is TRUE? a.The company is unlikely to call the bonds because interest rates have declined. b.The company will not call the bonds because the bond price is below the call price .c.The company will call the bonds because the bond price is above the call price. d.The company will call the bonds because the bond price is above the par value. e.The company is likely to call the bonds because interest rates have increased.
b.The company will not call the bonds because the bond price is below the call price.
The major contribution of the Miller model is that it demonstrates that a. personal taxes increase the value of using corporate debt. b. debt costs increase with financial leverage. c. ***personal taxes decrease the value of using corporate debt. d. financial distress and agency costs reduce the value of using corporate debt. e. equity costs increase with financial leverage.
c. ***personal taxes decrease the value of using corporate debt.
Which of the following statements is CORRECT, holding other things constant? a. Decrease in the corporate tax rate is likely to encourage a company to use more debt in its capital structure. b. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation. c. *Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively more debt. d. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation. e. An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
c. *Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively more debt.
Which one of the following statements is FALSE about projecting financial statements? a. If specified liabilities > specified assets then there will be a positive number for special dividend. b. Accounts payable should be projected as a percentage of sales. c. Depreciation should be projected as a percentage of sales. d. Interest expense should be projected as a percentage of debt. e.Inventory should be projected as a percentage of sales.
c. Depreciation should be projected as a percentage of sales.
Which one of the following statements is FALSE? Assume there is no capital rationing. a. If the projects are mutually exclusive and the WACC is less than 10%, then only project B should be chosen. b. Project A's IRR is greater than project B's IRR. c. No matter what the WACC, at least one of the projects will be chosen. d. If the projects are independent and the WACC is less than 17% then both projects should be chosen. e.If the projects are independent and the WACC is less than the crossover rate of 12% then both projects should be chosen.
c. No matter what the WACC, at least one of the projects will be chosen.
10. Which of the following statements is TRUE? a. Only one class of shares may have votes attached to them b. In the constant growth model, the growth rate must be greater than the required return. c. Return on invested capital (ROIC) measures the return to the total invested equity capital in the firm d. Voting rights don't impact the price of a share of stock e.The value of a perpetuity can be calculated using the constant growth model by setting the growth rate to zero.
c. Return on invested capital (ROIC) measures the return to the total invested equity capital in the firm
. Suppose that at the end of year 4, when the bonds above become callable, the yield to maturity is 8%. Which ONE of the following statements is TRUE? a. The company is likely to call the bonds because interest rates have remained constant. b. The company will wait until the bonds mature to call them to maximize their time value. c. The company definitely will not call the bonds because the call price is above the bond price. d. The company definitely will call the bonds because the bond price is above the call price. e.The company is unlikely to call the bonds because interest rates have increased.
c. The company definitely will not call the bonds because the call price is above the bond price.
Which one of the following statements is FALSE? a.The call option is in the money. b.The call option's exercise value is $3.00. c.*The call option's market price will be less than $3.00. d.The put option cannot be exercised profitably at the current stock price.e.The put option gives the holder the right to sell 1 share of Vol stock at $100.
c.*The call option's market price will be less than $3.00.
22. Daylight Solutions is considering a recapitalization that would increase its debt ratio and increase its interest expense. The company would issue new bonds and use the proceeds to buy back shares of its common stock. The company's CFO thinks the plan will not change total assets or operating income, but that it will increase earnings per share (EPS). Assuming the CFO's estimates are correct, which ONE of the following statements is CORRECT? a.If the plan reduces the WACC, the stock price is also likely to decline. b.Since the plan is expected to increase EPS, this implies that net income is also expected to increase. c.Since the proposed plan increases Daylight's financial risk, the company's stock price still might fall even if EPS increases. d.If the plan does increase the EPS, the stock price will automatically increase at the same rate. e.Under the plan there will be more bonds outstanding, and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds
c.Since the proposed plan increases Daylight's financial risk, the company's stock price still might fall even if EPS increases.
Which one of the following should influence a firm's dividend policy decision? a. A strong preference by most shareholders for interest income. b. The fact that much of the firm's equipment has been leased rather than bought and owned .c. The fact that Congress is considering changes in the corporate income tax rate. d. *Constraints imposed on the firm's use of borrowed funds by the firm's bond indenture. e. The firm's ability to use accelerated depreciation on its capital investments.
d. *Constraints imposed on the firm's use of borrowed funds by the firm's bond indenture.
Which ONE of the following statements is TRUE? a. The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share. b. All else equal, an increase in the corporate tax rate would tend to encourage a company to decrease its debt ratio. c. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC. d. Even though debt is cheaper than equity, increasing a company's debt ratio might increase its WACC. e.When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase.
d. Even though debt is cheaper than equity, increasing a company's debt ratio might increase its WACC.
Which ONE of the following statements is TRUE? a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt. b. The capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share. c. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC. d. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should decrease their use of debt. e.The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that minimizes its stock price.
d. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should decrease their use of debt.
10. Which one of the following statements is TRUE about the two previous problems? a.The embedded real option is a growth option. b.The project is more valuable when Barnes waits because of the time value of money. c.Since Barnes can wait to decide to make the investment rather than invest now, the exercise value for this real option would be zero. d.*The value of this real option comes from not having to invest when it is unprofitable to do so. e.If modeled as a financial option, the value, P, of the underlying asset would be the present value of only the cash flows received when Barnes chooses to invest.
d.*The value of this real option comes from not having to invest when it is unprofitable to do so.
23. F. Marston, Inc. has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)? a.A switch to a just-in-time inventory system and outsourcing production. b.The company reduces its dividend payout ratio. c.The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. d.A sharp increase in its forecasted sales. e.The company discovers that it has excess capacity in its fixed assets.
d.A sharp increase in its forecasted sales
24. Spontaneous funds are generally defined as follows: a.A forecasting approach in which the forecasted percentage of sales for each item is held constant. b.Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock. c.Assets required per dollar of sales. d.Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes. e.The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.
d.Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
Which ONE of the following statements is FALSE? a.In the dividend growth model, an increase in the market risk premium will cause the predicted stock price to decline. b.In the corporate valuation model, a permanent decrease in the fixed assets will cause the predicted stock price to incrrease. c.If a firm increases its payout ratio, the dividend growth model would predict an increase in the stock price. d.If a firm increases its payout ratio, the corporate valuation model would predict an increase in the stock price. e.A decrease in the corporate tax rate would lead to a higher WACC and and a higher hurdle rate of return for new projects.
d.If a firm increases its payout ratio, the corporate valuation model would predict an
Which ONE of the following statements concerning common stock and the investment banking process is FALSE? a.If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market. b.Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm. c.The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue. d.Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer .e.The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue.
d.Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer
18. Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to a decrease in the firm's dividend per share?a. The company increases the percentage of debt in its target capital structure .b. The number of profitable potential projects decreases .c. The firm's net income increases .d. Congress raises the tax rate on capital gains. The remainder of the tax code is not changed. e. *Earnings are unchanged, but the firm issues new shares of common stock.
e. *Earnings are unchanged, but the firm issues new shares of common stock.
Which one of the following statements is TRUE about the two previous problems? a.The embedded real option is an investment timing option .b.The project is more valuable when Haslam expands because of the time value of money. c.The value of this real option comes from abandoning the project when it is unprofitable to continue. d.If modeled as a financial option, the value, P, of the underlying asset would be the present value of only the cash flows received when Haslam chooses to invest. e.*The time to expiration of the embedded option is 5 years.
e.*The time to expiration of the embedded option is 5 years.
30. Which one of the following statements is FALSE? a. The Corporate Valuation model can be used when the percentages of debt and equity in the capital structure are expected to remain fixed. b. The APV model should be used when the post-merger capital structure changes significantly. c. Goodwill is amortized for tax purposes. d. Goodwill is created when a firm pays an acquired firm's board of directors a premium for their shares. e.FCFE is free cash flow minus after-tax payments made to debtholders.
e.FCFE is free cash flow minus after-tax payments made to debtholders.
Which ONE of the following statements is FALSE? a.Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. b.When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. c.It is possible for a firm to go public and yet not raise any additional new capital .d.When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held." e.Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
e.Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
Which ONE of the following statements is TRUE? a.The after-tax salvage value is the gain on the sale less the taxes due on the gain. b.Required investment in inventory is an example of a sunk cost. c.Only the after-tax portion of interest expense is deducted when calculating the cash flows for capital budgeting purposes. d.If the company doesn't have to increase the amount of debt it has to finance the project, the unlevered cost of equity should be used to discount the project's cash flows. e.None of the above are true.
e.None of the above are true.
. Which one of the following statements about the SNAP IPO is TRUE? a. Shares issued in the IPO entitle the owner to $1 per share annual dividend. b. The the existing Class B shares were converted to Class A shares and sold to the public during the IPO. c. After the IPO, the new shares will represent about 20% of the voting power in the company. d. Before the IPO, SNAP was financed with approximately 20% debt. e.SNAP issuing costs were substantially lower than the standard 7%.
e.SNAP issuing costs were substantially lower than the standard 7%.
Which one of the following statements is TRUE a.If a project has two IRRs, then the MIRR will be numerically equal to the average of the two IRRs. b.The IRR of a negative NPV project will be undefined. c.The NPV of a project's cashflows when discounted at the MIRR is zero. d.The profitability index (PI) measures how many years it takes before the project's initial investment is recovered. e.The MIRR and the IRR both have the same decision rule for project acceptance when the IRR is defined.
e.The MIRR and the IRR both have the same decision rule for project acceptance when the IRR is defined.
Which of the following statements is TRUE about callable bonds? a.A bondholder who purchases the bond at issue will realize the same rate of return whether or not the bond is called. b.If the bond issuer calls the bond, investors can choose to forego the call and hold the bonds until maturity. c.If interest rates increase above the bond's coupon rate, then the issuing company will call the bonds to lock in the rate. d.Investors prefer callable bonds because they offer the same return as non-callable bonds but with lower risk. e.The bond's coupon rate is higher than it would have been if the bonds had not been callable.
e.The bond's coupon rate is higher than it would have been if the bonds had not been callable.
Which ONE of the following statements is TRUE? a.A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt. b.The capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share. c.If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC. d.Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt. e.The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price.
e.The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price
