DEVRY FIN 516 Week 8 Final Exam Guide

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DEVRY FIN 516 Week 8 Final Exam Guide

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• FIN 516 Week 8 Final Exam Guide
• Question 1.1. (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 unlevered cost of
  equity.(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 MMs original (with tax) assumptions.(d)
  For a given D/S, the WACC is greater than the
  WACC under MMs original (with tax)
  assumptions.(e) The total value of the firm is
  independent of the amount of debt it uses.
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• Question 2.2. (TCO D) Which of the following
  statements is most correct?(a) In a private
  placement, securities are sold to private
  (individual) investors rather than to
  institutions.(b) Private placements occur most
  frequently with stocks, but bonds can also be
  sold

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• in a private placement.(c) Private placements
  are convenient for issuers, but the convenience
  is offset by higher flotation costs.(d) The SEC
  requires that all private placements be handled
  by a registered investment banker.(e) Private
  placements can generally bring in funds faster
  than is the case with public offerings. (Points
  20)
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• Question 3.3. (TCO E) Busters Beverages is
  negotiating a lease on a new piece of equipment
  that would cost 100,000 if purchased. The
  equipment falls into the MACRS 3-year class, and
  it would be used for 3 years and then sold,
  because the firm plans to move to a new facility
  at that time. The estimated value of the
  equipment after 3 years is 30,000. If the borrow
  and purchase option is used, the cash flows would
  be the following (Year 1) -2,400 (Year 2)
  -3,800 (Year 3) -1,400 (Year 4) -79,600 all of
  these cash outflows would be at the beginning of
  the respective years. Alternatively, the firm
  could lease the equipment for 3 years, with
  annual lease payments of 29,000 per year,
  payable at the beginning of each year. The firm
  is in the 20 tax bracket. If it borrows and
  purchases, it could obtain a 3-year simple
  interest loan, to purchase the equipment at a
  before-tax interest rate of 10. If there is a
  positive net advantage to leasing, the firm will
  lease the equipment. Otherwise, it will buy it.
  What is the NAL?(a) 5,736(b) 6,023(c)
  6,324(d) 6,640(e) 6,972 (Points 20)
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Question 4.4. (TCO I) Suppose hockey skates sell
in Canada for 105 Canadian dollars, and 1
Canadian dollar equals 0.71 U.S. dollars. If
purchasing power parity (PPP) holds, what is the
price of hockey skates in the United States?(a)
14.79(b) 63.00(c) 74.55(d) 85.88(e)
147.88 (Points 20) Page 2Question 1.1. (TCO
C) Dentaltech Inc. projects the following data
for the coming year. If the firm follows the
residual dividend policy and also maintains its
target capital structure, what will its payout
ratio be? EBIT 2,000,000Capital budget
850,000Interest rate 10 Debt 40Debt
outstanding 5,000,000 Equity 60Shares
outstanding 5,000,000Tax rate 40(a) 37.2(b)
39.1(c) 41.2(d) 43.3(e) 45.5 (Points 20)
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Question 4.4. (TCO G) Which of the following
statements is most correct?(a) Our bankruptcy
laws were enacted in the 1800s, revised in the
1930s, and have remained unaltered since that
time.(b) Federal bankruptcy law deals only with
corporate bankruptcies. Municipal and personal
bankruptcy are governed solely by state laws.(c)
All bankruptcy petitions are filed by creditors
seeking to protect their claims against firms in
financial distress. Thus, all bankruptcy
petitions are involuntary as viewed from the
perspective of the firms management.(d)
Chapters 11 and 7 are the most important
bankruptcy chapters for financial management
purposes. If a reorganization plan cannot be
worked out under Chapter 11, then the company
will be liquidated as prescribed in Chapter 7 of
the Act.(e) Restructuring a firms debt can
involve forgiving a certain portion of the debt,
but it cannot call for changing the debts
maturity or its contractual interest rate.
(Points 20) Page 3Question 1.1. (TCO I) In
1985, a given Japanese imported automobile sold
for 1,476,000 yen, or 8,200. If the car still
sold for the same amount of yen today but the
current exchange rate is 144 yen per dollar, what
would the car be selling for today in U.S.
dollars?(a) 5.964(b) 8,200(c) 10,250(d)
12,628(e) 13,525 (Points 20) Question 2.2.
(TCO H) Which of the following statements is most
correct?(a) The acquiring firms required rate
of return in most horizontal mergers will not be
affected, because the two firms will have similar
betas.
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Question 2.2. (TCO F) Warren Corporations stock
sells for 42 per share. The company wants to
sell some 20-year, annual interest, 1,000 par
value bonds. Each bond would have 75 warrants
attached to it, each exercisable into one share
of stock at an exercise price of 47. The firms
straight bonds yield 10. Each warrant is
expected to have a market value of 2.00 given
that the stock sells for 42. What coupon
interest rate must the company set on the bonds
in order to sell the bonds-with-warrants at
par?(a) 7.83(b) 8.24(c) 8.65(d) 9.08(e)
9.54 (Points 20)  Question 3.3. (TCO B)
Reynolds Resorts is currently 100 equity
financed. The CFO is considering a
recapitalization plan under which the firm would
issue long-term debt with a yield of 9 and use
the proceeds to repurchase common stock. The
recapitalization would not change the companys
total assets, nor would it affect the firms
basic earning power, which is currently 15. The
CFO believes that this recapitalization would
reduce the WACC and increase stock price. Which
of the following would also be likely to occur if
the company goes ahead with the recapitalization
plan? (a) The companys net income would
increase.(b) The companys earnings per share
would decline.(c) The companys cost of equity
would increase.(d) The companys ROA would
increase.(e) The companys ROE would decline.
(Points 20)
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Question 2.2. (TCO H) Which of the following
statements is most correct?(a) The acquiring
firms required rate of return in most horizontal
mergers will not be affected, because the two
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 firms 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.
(Points 20) Question 3.3. (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 (Points 20) Question 4.4.
(TCO F) A swap is a method used to reduce
financial risk. Which of the following statements
about swaps, if any, is not correct?(a) A swap
involves the exchange of cash payment
obligations.(b) The earliest swaps were currency
swaps in which companies traded debt denominated
in different currencies, say dollars and
pounds.(c) Swaps are very often arranged by a
financial intermediary, who may or may not take
the position of one of the counterparties.