1. (TCO B) Which of the following statements concerning the MM extension with gr
ID: 2684315 • Letter: 1
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1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT? (a) The tax shields should be discounted at the cost of debt. (b) The value of a growing tax shield is greater 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 MM's original (with tax) assumptions. (d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions. (e) The total value of the firm increases with the amount of debt. 2. (TCO D) Which of the following is generally NOT true and an advantage of going public? (a) Facilitates stockholder diversification. (b) Increases the liquidity of the firm's stock. (c) Makes it easier to obtain new equity capital. (d) Establishes a market value for the firm. (e) Makes it easier for owner-managers to engage in profitable self-dealings 3. (TCO E) Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm has the option to buy these tools. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at interest rate of 10% and buy the tools. The loan payments would be made at the end of each year. If it decides to lease or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. The Total Cash Outflows from the Cost of Purchase are the following: (Year 1)+208; (Year 2) +208; (Year 3) -4,592; all occurring at the end of respective years. Calculate the leasing cash outflows, and compare the Present Values. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.) (a) $96 (b) $106 (c) $112 (d) $117 (e) $123 4. (TCO I) Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market? (a) 1 U.S. dollar = 0.6235 Canadian dollars (b) 1 U.S. dollar = 0.6265 Canadian dollars (c) 1 U.S. dollar = 1.0000 Canadian dollars (d) 1 U.S. dollar = 1.5961 Canadian dollars (e) 1 U.S. dollar = 1.6039 Canadian dollars 5. (TCO C) Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, and its board of directors has decreed that no new stock can be issued during the coming year. If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure? (a) $673,652 (b) $709,107 (c) $746,429 (d) $785,714 (e) $825,000 6. 2. (TCO F) Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant? (a) $3.76 (b) $3.94 (c) $4.14 (d) $4.35 (e) $4.56 7. (TCO B) Which of the following statements is CORRECT, holding other things constant? (a) Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt. (b) An increase in the personal tax rate is likely to increase the debt ratio of the average corporation. (c) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation. (d) An increase in the company's 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. 8. (TCO G) Chapter 7 of the Bankruptcy Act is designed to do which of the following? (a) Protect 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 emerging 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 insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt. 9. (TCO I) Suppose one British pound can purchase 1.82 U.S. dollars today 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 10. (TCO H) Which of the following statements is most CORRECT? (a) The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas. (b) Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return. (c) The basic rationale for any financial merger is synergy and, thus, the estimation of pro-forma cash flows is the single most important part of the analysis. (d) In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms. (e) The primary rationale for most operating mergers is synergy. 11. . (TCO A) An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options? (a) In-the-money (b) Put (c) Naked (d) Covered (e) Out-of-the-money 12. (TCO F) Which of the following statements is most CORRECT? (a) One advantage of forward contracts is that they are default free. (b) Futures contracts generally trade on an organized exchange and are marked to market daily. (c) Goods are never delivered under forward contracts, but are almost always delivered under futures contracts. (d) There are futures contracts for currencies but no forward contracts for currencies. (e) Futures contracts don't have any margin requirements but forward contracts doExplanation / Answer
(e) The total value of the firm increases with the amount of debt c) Makes it easier to obtain new equity capital. (c) $112
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