Corp Finance

An all-equity-financed firm currently has a value of $120,000,000. Under tradeoff theory ignoring bankruptcy costs, how much does the value of the firm increase if it issues $20,000,000 in debt at 6% and repurchases equity at market value with the cash, given a 21% marginal tax bracket? Assume the interest expense will stay constant forever.

$20,000,000 * 0.21 = $4,200,000

.Which of these dates occurs last in time (when arranged in the chronological order)? a. Payment date b. Ex-dividend date c. Record date d. Dividend declaration date

a

On February 12, Michigan Mining declared a $3-per-share quarterly dividend payable on May 19 to stockholders of record on Wednesday, April 10. What is the latest date by which you could purchase the stock and still get the recently declared dividend? A. April 5, Friday B. April 8, Monday C. April 9, Tuesday D. April 10, Wednesday

a

Learn and Earn Company is financed entirely by Common stock that is priced to offer a 20% expected return. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected return on the common stock after refinancing? (No tax) a. 32% b. 28% c. 20% d. None of the above

a re = ra + (D/E)(ra-rd) = 0.2 + (0.5/0.5)(0.2-0.08) = 32%

An option that can be exercised any time before expiration date is called: a. An European option b. An American option c. A call option. d A put option

b

Generally, investors view the announcement of an open-market repurchase program as A. bad news, and the stock price drops. B. good news, and the stock price increases. C. a nonevent that does not affect the stock price. D. very bad news, and the stock price plunges.

b

In the Capital Structure lecture, we discussed how the cost of equity increases as company leverage increases. Why does this occur? a.The tax shield on interest expense causes an increase in cost of equity b.The risk of the company's stock increases when leverage increases c.Equity is worth more than debt d.Who knows? It just does

b

In the M&M theory of capital structure, if we consider taxes but ignore bankruptcy, how does firm value change as we increase leverage? a.Increases for a while, then decreases b.Increases without bound c.Decreases until it hits zero d.It is impossible to tell

b

The higher the underlying stock price: (everything else remaining the same) a. Higher the put price b. Lower the put price c. Has no effect on put price d. None of the above

b

The price of aput option is __________ correlated with the stock price and __________ correlated with the exercise price. A. negatively; negatively B. negatively; positively C. positively; negatively D. positively; positively

b

The value of a put option at expiration is: a. Market price of the share minus the exercise price b. Higher of the exercise price minus market price of the share and zero c. The exercise price d. None of the above

b

The equity beta of a levered firm is 1.6. The beta of debt is 0.2. The firm's debt to value ratio (D/(D+E)) is 0.375. What is the asset beta if the tax rate is zero? a. 1.25 b. 1.075 c. 0.822 d. None of the above

b D/E=0.375/(1-0.375)=0.61.4= asset beta + 0.6 (asset beta-0.2) asset beta = 1.075

2.Dividends are decided by: I) The managers of a firm II) The government III) The board of directors a. I only b. II only c. III only d. I and II only

c

Firms can pay out cash to their shareholders in the following ways: I) Dividends II) Share repurchases III) Interest payments a. I only b. II only c. I and II only d. III only

c

Learn and Earn Company is financed entirely by Common stock that is priced to offer a 15% expected return. If the company repurchases 60% of the stock and substitutes an equal value of debt yielding 6% (rd), what is the expected return on the common stock (re) after refinancing (the tax rate is 40%)? a. 19.2% b. 28.5% c. 23.1% d. None of the above

c

MM's Proposition I corrected for the inclusion of corporate income taxes is expressed as: a. VL= VU b. VL= VU+ D(1 - TC) c. VL= VU+ (TC)(D) d. VU= VL+ (TC)(D)

c

Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price? a. The seller will need to deliver stock to the owner of the option b. The seller will be obliged to buy stock from the owner of the option c. The owner will not exercise his option d. None of the above

c

Which of the following forms of financing does the pecking order theory of capital structure suggest that managers dislike the most?a.Internal funding b.Convertible debt c.Equity d.Debt

c

If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the tax rate is 30%) a. $8.00 million b. $5. 6million c. $30 million d. $26.67 millione. None of the above

c D/E=0.375/(1-0.375)=0.61.4= asset beta + 0.6 (asset beta-0.2) asset beta = 1.075

A put option gives the owner the right: a. And the obligation to buy an asset at a given price b. And the obligation to sell an asset at a given price c. But not the obligation to buy an asset at a given price d. But not the obligation to sell an asset at a given price

d

If a firm permanently borrows $300 million at an interest rate of 15%, what is the present value of the interest tax shield? (Assume that the tax rate is 30%) a. $45.00 million b. $13. 5million c. $60 million d. $90 million e. None of the above

d

Minimizing the weighted average cost of capital (WACC) is the same as: a. Maximizing the book value of the firm b. Maximizing the profits of the firm c. Maximizing the liquidating value of the firm d. Maximizing the market value of the firm

d

One possible reason that shareholders often insist on higher dividends is A. they agree with Miller and Modigliani. B. the capital gains tax disadvantage. C. the stock market is efficient. D. they do not trust managers to spend retained earnings wisely.

d

The equity beta of a levered firm is 1.2. The beta of debt is 0.2. The firm's market value debt to equity ratio is 0.5. What is the asset beta if the tax rate is zero? a. 1.2 b. 0.73 c. 0.2 d. None of the above

d

Which of the following features increase(s) the value of a call option? a. A high interest rate b. A long time to maturity c. A higher volatility of the underlying stock price d. All of the above

d

An European option gives its owner the right to exercise the option at any time before expiration.

false

A call options gives its owner the right to buy stock at a fixed strike price during a specified period of time. 2

true