FIN 540 MID TEST : 25 QUESTIONS :

Question 1

Which of the following is generally NOT true and an advantage of going public?

a. b. c. d. e.

Question 2.

Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the

a. b. c. d. e.

Question 3

Which of the following statements is most CORRECT?

a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.

b. c. d. e .

Question 4

Which of the following statements is most CORRECT?

a. Preferred stock generally has a higher component cost of capital to the firm than does common stock.

b. c. d. e .

Question 5

Which of the following statements is most CORRECT?

a. Tax considerations often play a part in mergers.  If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes.  Thus, firms with excess cash rarely undertake mergers.

b. c. d. e .

Question 6

Which of the following statements concerning warrants is correct?

a. Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock’s price increases. However, if the option is exercised, the issuing company’s debt declines if warrants were used but remains the same if it used convertibles.

b. c. d. e.

Question 7

Which of the following statements concerning common stock and the investment banking process is NOT CORRECT?

a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.

b. c. d. e.

Question 8

Firms use defensive tactics to fight off undesired mergers.  These tactics do not include :

a. raising antitrust issues.

b. c. d. e.

Question 9

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. c. d. e.

Question 10

Which of the following statements is NOT CORRECT?

a. When a corporation’s shares are owned by a few individuals who own most of the stock or are part of the firm’s management, we say that the firm is “closely, or privately, held.”

b. c. d. e.

Question 11

Chapter 7 of the Bankruptcy Act is designed to do which of the following?

a. Protect shareholders against creditors.

b.. c. d. e.

Question 12

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. c. d. e.

Question 13

In the lease versus buy decision, leasing is often preferable.

a. because it has no effect on the firm’s ability to borrow to make other investments.

b. c. d. e.

Question 14

Which of the following statements is most CORRECT?

a. Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public.

b. c. d. e.

Question 15

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

a. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.

b. c. d. e.

Question 16

Which of the following statements is most CORRECT?

a. A conglomerate merger is one where a firm combines with another firm in the same industry.

b. c. d. e.

 

Question 17

Operating leases often have terms that include

a. maintenance of the equipment by the lessor.

b. c. d. e.

Question 18

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee’s

a. equity cash flows.

b. c. d. e.

Question 19

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago.  It has been amortizing $3 million of flotation costs on these bonds over their 30-year life.  The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today’s market.  A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million.  NYW’s marginal tax rate is 40%.  The new bonds would be issued when the old bonds are called.

What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?

a. $5,049,939 .

b. c. d. e.

Question 20

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. c. d. e.

Question 21

Dunbar Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware.  Dunbar’s analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16%.  Eastern has 4 million shares outstanding and no debt.  Eastern’s current price is $16.25.  What is the maximum price per share that Dunbar should offer?

a. $16.25 .

b. c. d. e.

Question 22

Kelly Tubes is considering a merger with Reilly Tires.  Reilly’s market-determined beta is 0.9, and the firm currently is financed with 20% debt, at an interest rate of 8%, and its tax rate is 25%.  If Kelly acquires Reilly, it will increase the debt to 60%, at an interest rate of 9%, and the tax rate will increase to 35%.  The risk-free rate is 6% and the market risk premium is 4%.  What will Reilly’s required rate of return on equity be after it is acquired?

a. 7.4%

b. c. d. e.

Question 23

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can’t be consolidated.  The parent receives annual dividends from the subsidiary of $2,500,000.  If the parent’s marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

a. 10.2%; $2,245,000 .

b. c. d. e.

Question 24

The State of Idaho issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago.  The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so.  The call premium would be 5% of the face amount.  Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%.  What is the net present value of the refunding?  Because these are tax-exempt bonds, taxes are not relevant.

a. $278,606 .

b. c. d. e.

Question 25

Europa Corporation is financing an ongoing construction project.  The firm will need $5,000,000 of new capital during each of the next 3 years.  The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later.  Its target capital structure is 40% debt and 60% equity, and it wants to be at that structure in 3 years, when the project has been completed.  Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds.  Yearly flotation costs for 3 separate issues of debt would be 3.0% of the gross amount.  Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in 3 separate issues?

a. $79,425 .

 

b. c. d. e .

 

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