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