Fi516 Advanced Finance

Study Guide for Final Exam 1. (TCO B) Which of the spare-time activity statements concerning the MM extension with growth is NOT all overcompensate? (a) The tax shields should be discounted at the unlevered live of equity. (b) The survey 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 captain (with tax) assumptions. (d) For a given D/S, the WACC is greater than the WACC under MMs original (with tax) assumptions. e) The get along value of the solid is indep differenceent of the amount of debt it wonts. (Points 20) 2. (TCO D) Which of the quest statements is most CORRECT? (a) In a private placement, securities are sold to private (individual) investors sort of than to institutions. (b) Private placements occur most frequently with stocks, but bonds can also be sold in a private placement. (c) Private placements are convenient for issuers, but the convenience is offset by higher floatation costs. (d) The SEC requires that all private placements be handled by a registered investment banker. e) Private placements can generally bring in funds hurried than is the case with public offerings. (Points 20) 3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential consider for a transport with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan arrange would be 10%, and the loan would be amortized over the trucks 4-year life. The loan buckle underments would be made at the end of each year. The truck go forth be used for 4 years, at the end of which meter it will be sold at an estimated residual value of $10,000.If DTC buys the truck, its later tax property flows would be the following (Year 1) 6,339 (Year 2) -4,764 (Year 3)-9,943 (Year 4) -5,640 all occurring at the end of respective years. The take terms, call for a $10,000 lease payment (4 pa yments total) at the beginning of each year. DTCs tax pose is 40%. Should the firm lease or buy? (a) $849 (b) $896 (c) $945 (d) $997 (e) $1,047 (Points 20) 4. (TCO I) look 90-day investments in Britain have a 6% annualized return and a 1. 5% quarterly (90-day) return. In the U. S. 90-day investments of similar seek have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British thud equals $1. 65. If interest pasture comparisonity holds, what is the spot exchange rate? (a) 1 pound = $1. 8000 (b) 1 pound = $1. 6582 (c) 1 pound = $1. 0000 (d) 1 pound = $0. 8500 (e) 1 pound = $0. 6031 (Points 20) 1. (TCO C) D. Paul Inc. forecasts a chapiter budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000.If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? Net Income Payout (a) $898,7 50 55. 63% (b) $943,688 58. 41% (c) $990,872 61. 43% (d) $1,040,415 64. 40% (e) $1,092,436 67. 62% (Points 20) 2. (TCO F) warren Corporations stock dish outs 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 integrity share of stock at an exercise price of $47.The firms bully 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) 3. (TCO B) Which of the following statements is CORRECT, holding other things constant? (a) Firms whose assets are relatively liquid hunt down to have relatively low bankruptcy costs, hence they tend to use relatively little debt. b) An increase in the personal tax rate is in all likelihood to increase th e debt ratio of the average corporation. (c) If changes in the bankruptcy codification make bankruptcy less(prenominal) costly to corporations, then this would likely go down the debt ratio of the average corporation. (d) An increase in the companys degree of operating supplement 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. (Points 20) 4. TCO G) Chapter 7 of the Bankruptcy Act is designed to do which of the following? (a) cheer shareholders against creditors. (b) Establish the rules of reorganization for firms with projected cash in flows that eventually will be sufficient to meet debt payments. (c) Ensure that the firm is viable after emergent 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 insolve nt debtors to discharge all of their obligations and to outgrowth over unhampered by a burden of prior debt. . (TCO I) Suppose one British pound can purchase 1. 82 U. S. dollars like a shot 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 (Points 20) 2. (TCO H) Which of the following statements around valuing a firm using the APV approach is most CORRECT? (a) The value of trading operations is calculated by discounting the panorama value, the tax shields, and the free cash flows at the cost of equity. b) The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. (c) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows onwards the horizon date at th e unlevered cost of equity. (d) The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity. (e) The APV approach stands for the accounting pre-valuation approach. (Points 20) 3. (TCO A) Which of the following statements is CORRECT? a) Put options give investors the well(p) to buy a stock at a certain gleam price before a specified date. (b) Call options give investors the accountability to sell a stock at a certain lease price before a specified date. (c) Options typically sell for less than their exercise value. (d) LEAPS are very short-term options that were created relatively recently and instantly trade in the market. (e) An option holder is not entitled to befool dividends unless he or she exercises their option before the stock goes ex dividend. (Points 20) 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 exchang e of cash payment obligations. (b) The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, cite 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. (d) A problem with swaps is that no standardized contracts exist, which has prevented the development of a lowly market. (e) A company can swap fixed interest payments for aimless interest payments. (Points 20)