罗斯公司理财题库全
罗斯公司理财题库全集
Chapter 20Issuing Securities to the Public Multiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.10. Dilution refers to:A. the increase in stock value due to wider ownership of stock.B. the loss in existing shareholder's equity.C. the loss in new shareholder's equity.D. the loss in all shareholder's equity, both existing shareholders and new shareholders.E. None of the above.11. During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains:A. exactly the same information as the final prospectus except an indication of SEC approval.B. all the information as the final prospectus including red writing stating it is a red herring.C. very limited financial information and red writing stating it is preliminary.D. only a description of what the funds are to be used for.E. information very similar to the final prospectus without a price nor with SEC approval.12. A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if:A. the issue is less than $50 million.B. the loan matures within 9 months.C. the issue is less than $5.0 million.D. Both A and B.E. Both B and C.13. Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if:A. the issue is for less than $5,000,000.B. insiders sell no more than $1,500,000 of stock.C. insiders sell no more than 100,000,000 shares.D. Both A and C.E. Both A and B.14. Potential investors learn of the information concerning the firm and its new issue from the:A. pre-underwriting negotiating meeting.B. red herring.C. letter of commitment.D. emails from their former finance professor.E. rights offering.15. A registration statement is effective on the 20th day after filing unless:A. the SEC is backlogged with statements.B. a tombstone ad is issued indicating its demise.C. a letter of comment suggesting changes is issued by the SEC.D. a syndicate can be formed sooner.E. None of the above.16. Investment banks perform which of the following services for corporate issuers:A. formulating the method used to issue the securities.B. pricing the new securities.C. selling the new securities.D. All of the above.E. None of the above.17. A group of investment bankers who pool their efforts to underwrite a security are known as a(n):A. amalgamate.B. conglomerate.C. green shoe group.D. klatch.E. syndicate.18. A firm commitment arrangement with an investment banker occurs when:A. the syndicate is in place to handle the issue.B. the spread between the buying and selling price is less than one percent.C. the issue is solidly accepted in the market evidenced by a large price increase.D. when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.E. when the investment banker sells as much of the security as the market can bear without a price decrease.19. Which of the following is not normally an example of the services offered by investment bankers?A. Aiding in the sale of securitiesB. Facilitating mergersC. Acting as brokers to both individuals and institutional clientsD. Offering checking accounts to corporationsE. Both C and D20. In a best efforts offering the investment banker makes their money primarily by:A. earning the spread between the buying and offering price.B. earning a commission on each share sold.C. earning the discount between the buying and offering price.D. charging a flat fee for all services.E. None of the above.。
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Chapter 23 Options and Corporate Finance: Extensions and A p p l i c a t i o n s A n s w e r K e yMultiple Choice Questions1. The option to abandon is:A. a real option.ually of little value because of the cost associated with abandonment.C.irrelevant in capital budgeting analysis.D.nearly always less relevant the option to expand.E.All of the above.Difficulty level: MediumTopic: OPTION TO ABANDONType: DEFINITIONS2. An example of a special option is:A.an executive stock option.B.the embedded option in a start-up company.C.the option in simple business contracts.D.the option to shut down and reopen a project.E.All of the above.Difficulty level: MediumTopic: SPECIAL OPTIONType: DEFINITIONS3. Executives can not exercise their options for a fixed period of time. This is the:A.investing period.B.freeze-out period.C.valuation period.D.guaranteed growth period.E.strike period.Difficulty level: MediumTopic: FREEZE-OUT PERIODType: DEFINITIONS4. The NPV approach must be:A.augmented by added analysis if there are a few embedded options.B.augmented by added analysis if a decision has significant embedded options.C.jettisoned if there are any embedded options.puted carefully to identify the options.E.None of the above.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS5. Options are granted to top corporate executives because:A.executives will make better business decisions in line with benefiting the shareholders.B.executive pay is at risk and linked to firm performance.C.options are tax-efficient and taxed only when they are exercised.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS6. The call option on a dividend paying stock compared to a non-dividend paying stock is:A.more valuable because of the extra dividend payment.B.equal in value because cash dividends are paid on stock only.C.less valuable because cash dividends are paid on stock only.D.less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.E.None of the above.Difficulty level: ChallengeTopic: CALL OPTION ON DIVIDEND PAYING STOCKType: CONCEPTS7. The value of the options awarded executives is much less than face value to the executives because:A.the value to the executive depends on the stock price being greater than the exercise price.B.the options must be held beyond the freeze-out period.C. a highly undiversified portfolio can have a large drop in value with high variance stocks.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS8. By rewarding executives with large option positions, corporations:A.cause the executives to hold highly undiversified portfolios.B.put the firm in a risky position to pay off the options.C.cause the value of the stock to fall because the options are theft.D.are really valueless because most options are never exercised.E.None of the above.Difficulty level: ChallengeTopic: EXECUTIVE OPTIONSType: CONCEPTS9. Investing in a negative NPV project today is a feasible choice if:A.there are future option alternatives.B.investing is sequentially limited.C.the discount rate is low.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: NEGATIVE NPV PROJECTS AND REAL OPTIONSType: CONCEPTS10. The opportunity to defer investing to a later date may have value because:A.the cost of capital may decline in the near future.B.certainty may be reduced in the future.C.investment costs fluctuate in time.D.All of the above.E.None of the above.Difficulty level: EasyTopic: OPTION TO DEFERType: CONCEPTS11. Rejecting an investment today forever may not be a good choice because:A.the size of the firm will decline.B.there are always errors in the estimation of NPVs.C.the option value is negative.D.the company's foregoing the future rights or option to the investment.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS12. A financial manager who does not follow the general constraints of the NPV rule may:A.accept a negative NPV project for fear of losing an investment opportunity.B.accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.C.not consider all options available in a capital budgeting decision.D.not take a positive NPV project even if the NPV is adequate reward to forego the option.E.All of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS13. The volatility of interest rates can affect the value of the project by:A.increasing the value as volatility increases.B.increasing the value as volatility decreases.C.decreasing the value as volatility increases.D.interest rate volatility does not affect value.E.None of the above.Difficulty level: MediumTopic: INTEREST RATE VOLATILITYType: CONCEPTS14. Which of the following statements is trueA.The Black Scholes model is the simplest to use and best used for complex situations.B.The binomial model does not handle options with dividend payments prior to expiration date.C.The Black Scholes model adequately handles the valuation of an American put.D.The binomal model is better for complex situations and is the simplest tool to use.E.The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool.Difficulty level: MediumTopic: OPTION PRICING TOOLSType: CONCEPTS15. If a project has optionality:A.the shorter the available life of the project the less valuable the project is.B.the longer the available life of the project the less valuable the project is.C.the shorter the available life of the project the more valuable the project is.D.available project life does not change optionality.E.None of the above.Difficulty level: EasyTopic: OPTIONALITYType: CONCEPTS16. The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable if:A.there is a constant variability.B.any new information impacting prices is similar period to period.C.interest or discount rates are constant.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: VARIABILITY AND INFORMATIONType: CONCEPTS17. The most correct method to determine the current value of future payoffs would be to:A.take the discounted expected value at the risk-free rate.B.take the expected value using the probabilities.C.take the discounted expected value using the risk-neutral probabilities and the risk free rate.D.sum the payoffs discounted at the risk free rate.E.None of the above.Difficulty level: MediumTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS18. The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:A.given by the probability of each state occurring.B.given by the value of the underlying asset under good news and the risk free rate.C.given by the value of the underlying asset under good news and bad news.D.given by the value of the underlying asset under good news, bad news, and the risk free rate.E.None of the above.Difficulty level: ChallengeTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS19. A branching tree for the binomial model:A.should capture all possible futures paths for the asset.B.has a move down followed by a move up on a subsequent branch to end at the same value as the reverse path.C.has a move down followed by a move up on a subsequent branch to end at a lower value than a move up then a move down.D.Both A and C.E.Both A and B.Difficulty level: ChallengeTopic: BINOMIAL MODELType: CONCEPTS20. Increasing the number of intervals in the binomial model causes the price shift parameters to change. New estimates are related to:A.the standard deviation of the underlying asset.B.the up state multiplier equals the standard deviation divided by root n.C.the number of intervals in a year.D.All of the above.E.None of the above.Difficulty level: MediumTopic: BINOMIAL MODELType: CONCEPTS21. Which of the following is not part of the Black Scholes option pricing modelA.Standard deviationB.Time to maturityC.Exercise priceD.Par value of the company's stockE.Interest rateDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS22. What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38A. 1.1159; .8961B..0317; 31.5789C..0317; .9683D..2193; .7807E.None of the aboveDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS23. On the notion of embedded options, which of the following is/are trueA.If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation.B.There are at least two possible outcomes for virtually every business idea.C.Virtually every business has both the option to abandon and the option to expand.D.All of the above.E.Both B and C.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS24. A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value. This value can be primarily attributed to:A.the potential sale of the company.B.the low exercise price held by the shareholders.C.the option to open the facility when prices rise dramatically.D.All of the above.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTSNote: Correct answers to later questions are dependent on correct answers to earlier questions.Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 4%.25. What is d1A..1842B..4102C..4583D..4909E..5412= [ln(22/22) + [.04 + (.50x.07)(3)]/ (.07)3d1= .225/.4583 = .4909d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS26. What is d2A..0121B..0252C..0326D..0452E..0525d 2 = d1- √σ2t = .4909 - √(.07)(3) = .4909 - .4583 = .0326Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS27. What is e-rtA..6087B..7087C..7952D..8476E..8869e-.04(3) = .8869Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS28. Calculate N(d).1A..5054B..6508C..6882D..7047E..8096) = .50 + .1882 = .6882 N(d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS29. Calculate N(d).2A..5130B..5578C..6085D..7085E..7142) = .50 + .0130 = .5130N(d2Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS30. What is the value of a call optionA.$4.14B.$4.86C.$5.13D.$5.62E.$6.16。
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Chapter 30Financial Distress Multiple Choice Questions1. Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?A. Cash payments are delayed to creditors.B. The market value of the stock declines by 10%.C. The firm's operating cash flow is insufficient to pay current obligations.D. Cash distributions are eliminated because the board of directors considers the surplus account to be low.E. None of the above.2. Insolvency can be defined as:A. not having cash.B. being illiquid.C. an inability to pay one's debts.D. an inability to increase one's debts.E. the present value of payments being less than assets.3. Stock-based insolvency is a:A. income statement measurement.B. balance sheet measurement.C. a book value measurement only.D. Both A and C.E. Both B and C.4. Flow-based insolvency is:A. a balance sheet measurement.B. a negative equity position.C. when operating cash flow is insufficient to meet current obligations.D. inability to pay one's debts.E. Both C and D.5. Financial restructuring can occur as:A. a private workout.B. an employee buy-out.C. a bankruptcy reorganization.D. Both A and C.E. Both B and C.6. Financial distress can involve which of the following:A. asset restructuring.B. financial restructuring.C. liquidation.D. All of the above.E. None of the above.7. APR, as it relates to financial distress, means the rules of:A. absolute profitability.B. arbitration priority.C. absolute priority.D. arbitration profitability.E. automatic profitability.8. The difference between liquidation and reorganization is:A. reorganization terminates all operations of the firm and liquidation only terminatesnon-profitable operations.B. liquidation terminates only profitable operations and reorganization terminates onlynon-profitable operations.C. liquidation terminates all operations and reorganization maintains the option of the firm as a going concern.D. liquidation only deals with current assets and reorganization only consolidates debt.E. None of the above.9. A firm that has a series of negative earnings, sales declines and workforce reductions is likely headed to:A. acquisition of another firm.B. a merger.C. financial distress.D. new financing.E. None of the above.10. Some of the various events which typically occur around the period of financial distress fora firm are:A. continued increase in earnings.B. steady growth.C. dividend reductions.D. Both A and B.E. Both A and C.11. Bankruptcy reorganizations are used by management to:A. forestall the inevitable liquidation in all cases.B. provide time to turn the business around.C. allow the courts time to set up an administrative structure.D. All of the above.E. None of the above.12. A firm has several options available to it in times of financial distress. The firm may:A. reduce capital and R & D spending.B. raise new funds by selling securities or major assets.C. file for bankruptcy.D. negotiate with lenders.E. All of the above statements are true.13. Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:A. forcing a firm to reevaluate their core operations.B. realigning their capital structure to reduce interest costs.C. entering Chapter 11 and liquidating the firm.D. Both A and B.E. Both A and C.14. Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:A. that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.B. that there is no priority of claims under Chapter 11.C. that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11.D. no lawyers fees are necessary under Chapter 7.E. None of the above.15. If a firm has a stock based insolvency in both book and market value terms and liquidates:A. the payoff will not be 100% to all investors.B. the unsecured creditors are likely to get less than full value.C. the equityholders typically should receive nothing.D. All of the above.E. None of the above.16. A firm in financial distress that reorganizes:A. continues to run the business as a going concern.B. must have acceptance of the plan by the creditors.C. may distribute new securities to creditors and shareholders.D. All of the above.E. None of the above.17. A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?A. After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors.B. After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder.C. After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder.D. After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake.E. None of the above.18. What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?A. administrative expenses, wages claims, government tax claims, debtholder and then equityholder claimsB. administrative expenses, wages claims, government tax claims, equityholder and then debtholder claimsC. wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claimsD. wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claimsE. None of the above19. The absolute priority rule:A. is set to ensure senior claims are paid first.B. is the priority rule in liquidations.C. distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.D. All of the above.E. None of the above.20. Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:A. take up to 120 days to file a reorganization plan.B. continue to run the business.C. reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place.D. All of the above.E. None of the above.21. Which of the following statements about private workouts of financial distress is NOT true?A. Senior debt is usually replaced with junior debt.B. Debt is usually replaced with equity.C. Private workouts account for about three quarters of all reorganizations.D. Top management is often dismissed or takes pay reductions.E. None of the above.22. Successful private workouts are better for firms than formal bankruptcy because:A. direct costs are considerably lower in private workouts.B. private workout firms can issue new debt senior to all prior debt.C. stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.D. Both A and B.E. Both A and C.23. Equityholders may prefer a formal bankruptcy filing because:A. the firm can issue debtor in possession debt.B. the firm can delay pre-bankruptcy interest payments.C. the lack of information about the length and magnitude of the cash flow problem favors equityholders.D. All of the above.E. None of the above.24. Prepackaged bankruptcies are:A. described as a combination of a private workout and a liquidation.B. the easiest way to transfer wealth to the shareholders.C. described as a combination of a completed private workout and the formal bankruptcy filing.D. All of the above.E. None of the above.25. In a prepackaged bankruptcy the firm:A. and creditors agree to a private reorganization outside formal bankruptcy.B. must reach agreement privately with most of the creditors.C. will have difficulty when there are thousands of reluctant trade creditors.D. All of the above.E. None of the above.26. Financial distress may be more expensive if the:A. information about the permanency of the shortfall is limited.B. firm has many different types of creditors and other investors.C. firm has never entered into bankruptcy before.D. Both A and B.E. Both B and C.27. The net payoff to creditors in formal bankruptcy may be low in present value terms because:A. the financial structure may be complicated with several groups and types of creditors.B. indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.C. administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process.D. All of the above.E. None of the above.28. Firms deal with financial distress by:A. selling major assets.B. merging with another firm.C. issuing new securities.D. exchanging debt for equity.E. All of the above.29. Perhaps equally, if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:A. loss of current customers.B. loss of business reputation.C. management consumed in survival and not on a strategic direction.D. All of the above.E. Both A and B.30. Credit scoring models are used by lenders to:A. determine the borrowers capacity to pay.B. aid in the prediction of default or bankruptcy.C. determine the optimal debt equity ratio.D. Both A and B.E. Both A and C.31. Altman develop the Z-score model for publicly traded manufacturing firms. Using financial statement data and multiple discriminant analysis, he found that:A. in actual use, a Z-score greater than 2.99 meant bankruptcy within one year.B. in actual use, a Z-score greater than 1.81 implied a 90% chance of bankruptcy within one year.C. in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year.D. in actual use, a Z-score less than 2.99 meant non-bankruptcy within one year.E. None of the above.32. The key intuition of a Z-score model like Altman's is that:A. only publicly traded firms can be evaluated.B. one will be just as well off by guessing on default rates.C. all corporations will default at least once.D. financial profiles of bankrupt and non-bankrupt firms are very different one year before bankruptcy.E. privately traded firms have better financial information which are disclosed to lenders and need not rely on any efficient market notions.33. Approximately ____ of all firms going through a Chapter 11 bankruptcy successfully reorganize.A. 0%B. 15%C. 25%D. 50%E. 85%34. Altman's Z-score predicts the:A. percentage of payout to equityholders in liquidations.B. percentage of payout to equityholders in reorganization.C. likelihood of a private workout.D. likelihood of bankruptcy of a firm within one year.E. None of the above.35. Very small firms (i.e. firms with assets less than $100,000) are more likely to:A. file for strategic bankruptcy.B. file for bankruptcy protection earlier than large firms.C. reorganize than liquidate compared to large firms.D. liquidate than reorganize compared to large firms.E. None of the above.36. A large negative equity position will lead a firm to be more likely to try to:A. not file bankruptcy.B. liquidate.C. reorganize.D. consolidate.E. None of the above.Magic Mobile Homes is to be liquidated. All creditors, both secured and unsecured, are owed $2 million. Administrative costs of liquidation and wage payments are expected to be $500,000.A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale proceeds. The corporate tax rate is 34%.37. How much and what percentage of their claim will the unsecured creditors receive, in total?A. $100,000; 12.50%.B. $290,909; 36.36%.C. $300,000; 37.50%.D. $600,000; 75.00%.E. Not enough information to answer38. How much and what percentage of their claim will the secured creditors receive, in total?A. $900,000; 75%B. $981,818; 81.82%C. $1,009,091; 84.1%D. $1,200,000; 100%E. Not enough information to answer.The management of Magic Mobile Homes has proposed to reorganize the firm. The proposal is based on a going-concern value of $2 million. The proposed financial structure is $750,000 in new mortgage debt, $250,000 in subordinated debt and $1,000,000 in new equity. All creditors, both secured and unsecured, are owed $2.5 million dollars. Secured creditors have a mortgage lien for $1,500,000 on the factory. The corporate tax rate is 34%.39. How much should the secured creditors receive?A. $1,000,000B. $1,250,000C. $1,333,333D. $1,500,000E. None of the above.40. How much should the unsecured creditors receive?A. $500,000B. $667,000C. $750,000D. $1,000,000E. None of the above.41. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?A. $0B. $35,714C. $583,333D. $1,000,000E. None of the above.The management of Schroeder Books has proposed to reorganize the company. The proposal is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000 in new mortgage debt, $300,000 in subordinated debt and $1,500,000 in new equity. All creditors, both secured and unsecured, are owed $3 million dollars. Secured creditors have a mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%.42. How much should the secured creditors receive?A. $1,500,000B. $2,000,000C. $2,300,000D. $3,000,000E. None of the above.43. How much should the unsecured creditors receive?A. $300,000B. $500,000C. $1,000,000D. $2,300,000E. None of the above.44. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?A. $0B. $35,714C. $583,333D. $1,000,000E. None of the above.Essay Questions45. The Steel Pony Company, a maker of all-terrain recreational vehicles, is having financial difficulties due to high interest payments. The estimated "going concern" value of Steel Pony is $4.0 million. The senior debt claim is on all fixed assets. The balance sheet of the firm is as shown:If Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amount to 5% of the total going concern value, determine the distribution of the proceeds under the rules of absolute priority.46. The Here Today Corporation has applied to your bank for a loan. You have their financial statements and the revised Z-score model of:Z = 6.56 (Net Working Capital/Total Assets) + 3.26 (Accumulated Retained Earnings/Total Assets) + 1.05 (EBIT/Total Assets) + 6.72 (Book Value of Equity/Total Liabilities) where:Z < 1.23 predicts bankruptcy. A Z score between 1.23 and 2.90 indicates gray area. A Z score greater than 2.90 indicates no bankruptcy. From the financial statements you gathered net working capital of $237,500; accumulated retained earnings of $120,000; book value of equity of $950,000; total assets of $4,750,000; EBIT of $261,250; and total liabilities of $3,800,000. Should the bank lend to Here Today?47. When choosing between liquidation and reorganization, what are some of the empirical factors that lead a firm toward one choice or the other?Chapter 30 Financial Distress Answer KeyMultiple Choice Questions1. Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?A. Cash payments are delayed to creditors.B. The market value of the stock declines by 10%.C. The firm's operating cash flow is insufficient to pay current obligations.D. Cash distributions are eliminated because the board of directors considers the surplus account to be low.E. None of the above.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: DEFINITIONS2. Insolvency can be defined as:A. not having cash.B. being illiquid.C. an inability to pay one's debts.D. an inability to increase one's debts.E. the present value of payments being less than assets.Difficulty level: EasyTopic: INSOLVENCYType: DEFINITIONS3. Stock-based insolvency is a:A. income statement measurement.B. balance sheet measurement.C. a book value measurement only.D. Both A and C.E. Both B and C.Difficulty level: EasyTopic: STOCK-BASED INSOLVENCYType: DEFINITIONS4. Flow-based insolvency is:A. a balance sheet measurement.B. a negative equity position.C. when operating cash flow is insufficient to meet current obligations.D. inability to pay one's debts.E. Both C and D.Difficulty level: EasyTopic: FLOW-BASED INSOLVENCYType: DEFINITIONS5. Financial restructuring can occur as:A. a private workout.B. an employee buy-out.C. a bankruptcy reorganization.D. Both A and C.E. Both B and C.Difficulty level: MediumTopic: FINANCIAL RESTRUCTURINGType: DEFINITIONS6. Financial distress can involve which of the following:A. asset restructuring.B. financial restructuring.C. liquidation.D. All of the above.E. None of the above.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: DEFINITIONS7. APR, as it relates to financial distress, means the rules of:A. absolute profitability.B. arbitration priority.C. absolute priority.D. arbitration profitability.E. automatic profitability.Difficulty level: MediumTopic: RULES OF ABSOLUTE PRIORITYType: DEFINITIONS8. The difference between liquidation and reorganization is:A. reorganization terminates all operations of the firm and liquidation only terminatesnon-profitable operations.B. liquidation terminates only profitable operations and reorganization terminates onlynon-profitable operations.C. liquidation terminates all operations and reorganization maintains the option of the firm as a going concern.D. liquidation only deals with current assets and reorganization only consolidates debt.E. None of the above.Difficulty level: MediumTopic: REORGANIZATION AND LIQUIDATIONType: DEFINITIONS9. A firm that has a series of negative earnings, sales declines and workforce reductions is likely headed to:A. acquisition of another firm.B. a merger.C. financial distress.D. new financing.E. None of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS10. Some of the various events which typically occur around the period of financial distress fora firm are:A. continued increase in earnings.B. steady growth.C. dividend reductions.D. Both A and B.E. Both A and C.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: CONCEPTS11. Bankruptcy reorganizations are used by management to:A. forestall the inevitable liquidation in all cases.B. provide time to turn the business around.C. allow the courts time to set up an administrative structure.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS12. A firm has several options available to it in times of financial distress. The firm may:A. reduce capital and R & D spending.B. raise new funds by selling securities or major assets.C. file for bankruptcy.D. negotiate with lenders.E. All of the above statements are true.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS13. Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:A. forcing a firm to reevaluate their core operations.B. realigning their capital structure to reduce interest costs.C. entering Chapter 11 and liquidating the firm.D. Both A and B.E. Both A and C.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: CONCEPTS14. Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:A. that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.B. that there is no priority of claims under Chapter 11.C. that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11.D. no lawyers fees are necessary under Chapter 7.E. None of the above.Difficulty level: EasyTopic: LIQUIDATION OR REORGANIZATIONType: CONCEPTS15. If a firm has a stock based insolvency in both book and market value terms and liquidates:A. the payoff will not be 100% to all investors.B. the unsecured creditors are likely to get less than full value.C. the equityholders typically should receive nothing.D. All of the above.E. None of the above.Difficulty level: EasyTopic: STOCK BASED INSOLENCYType: CONCEPTS16. A firm in financial distress that reorganizes:A. continues to run the business as a going concern.B. must have acceptance of the plan by the creditors.C. may distribute new securities to creditors and shareholders.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS17. A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?A. After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors.B. After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder.C. After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder.D. After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake.E. None of the above.Difficulty level: EasyTopic: LIQUIDATIONType: CONCEPTS18. What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?A. administrative expenses, wages claims, government tax claims, debtholder and then equityholder claimsB. administrative expenses, wages claims, government tax claims, equityholder and then debtholder claimsC. wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claimsD. wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claimsE. None of the aboveDifficulty level: MediumTopic: RULES OF ABSOLUTE PRIORITYType: CONCEPTS19. The absolute priority rule:A. is set to ensure senior claims are paid first.B. is the priority rule in liquidations.C. distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.D. All of the above.E. None of the above.Difficulty level: EasyTopic: RULES OF ABSOLUTE PRIORITYType: CONCEPTS20. Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:A. take up to 120 days to file a reorganization plan.B. continue to run the business.C. reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS21. Which of the following statements about private workouts of financial distress is NOT true?A. Senior debt is usually replaced with junior debt.B. Debt is usually replaced with equity.C. Private workouts account for about three quarters of all reorganizations.D. Top management is often dismissed or takes pay reductions.E. None of the above.Difficulty level: MediumTopic: PRIVATE WORKOUTSType: CONCEPTS22. Successful private workouts are better for firms than formal bankruptcy because:A. direct costs are considerably lower in private workouts.B. private workout firms can issue new debt senior to all prior debt.C. stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: PRIVATE WORKOUTSType: CONCEPTS23. Equityholders may prefer a formal bankruptcy filing because:A. the firm can issue debtor in possession debt.B. the firm can delay pre-bankruptcy interest payments.C. the lack of information about the length and magnitude of the cash flow problem favors equityholders.D. All of the above.E. None of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESS- EQUITY HOLDER PREFERENCESType: CONCEPTS24. Prepackaged bankruptcies are:A. described as a combination of a private workout and a liquidation.B. the easiest way to transfer wealth to the shareholders.C. described as a combination of a completed private workout and the formal bankruptcy filing.D. All of the above.E. None of the above.Difficulty level: EasyTopic: PREPACKAGED BANKRUPTCIESType: CONCEPTS25. In a prepackaged bankruptcy the firm:A. and creditors agree to a private reorganization outside formal bankruptcy.B. must reach agreement privately with most of the creditors.C. will have difficulty when there are thousands of reluctant trade creditors.D. All of the above.E. None of the above.Difficulty level: MediumTopic: PREPACKAGED BANKRUPTCIESType: CONCEPTS26. Financial distress may be more expensive if the:A. information about the permanency of the shortfall is limited.B. firm has many different types of creditors and other investors.C. firm has never entered into bankruptcy before.D. Both A and B.E. Both B and C.Difficulty level: MediumTopic: COSTS OF FINANCIAL DISTRESSType: CONCEPTS27. The net payoff to creditors in formal bankruptcy may be low in present value terms because:A. the financial structure may be complicated with several groups and types of creditors.B. indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.C. administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process.D. All of the above.E. None of the above.Difficulty level: MediumTopic: PAYOFF TO CREDITORSType: CONCEPTS28. Firms deal with financial distress by:A. selling major assets.B. merging with another firm.C. issuing new securities.D. exchanging debt for equity.E. All of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS29. Perhaps equally, if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:A. loss of current customers.B. loss of business reputation.C. management consumed in survival and not on a strategic direction.D. All of the above.E. Both A and B.Difficulty level: EasyTopic: INDIRECT COSTS FO FINANCIAL DISTRESSType: CONCEPTS。
【实用资料】罗斯公司理财题库全集.doc
Chapter 13 Risk, Cost of Capital, and Capital Budgeting Answer KeyMultiple Choice Questions1. The weighted average of the firm's costs of equity, preferred stock, and after tax debt is the:A. reward to risk ratio for the firm.B. expected capital gains yield for the stock.C. expected capital gains yield for the firm.D. portfolio beta for the firm.E. weighted average cost of capital (WACC).Difficulty level: EasyTopic: WACCType: DEFINITIONS2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:A. return on the stock minus the risk-free rate.B. difference between the return on the market and the risk-free rate.C. beta times the market risk premium.D. beta times the risk-free rate.E. market rate of return.Difficulty level: EasyTopic: CAPMType: DEFINITIONS3. The best fit line of a pairwise plot of the returns of the security against the market index returns is called the:A. Security Market Line.B. Capital Market Line.C. characteristic line.D. risk line.E. None of the above.Difficulty level: MediumTopic: CHARACTERISTIC LINEType: DEFINITIONS4. The use of debt is called:A. operating leverage.B. production leverage.C. financial leverage.D. total asset turnover risk.E. business risk.Difficulty level: MediumTopic: USE OF DEBTType: DEFINITIONS5. The weighted average cost of capital for a firm is the:A. discount rate which the firm should apply to all of the projects it undertakes.B. overall rate which the firm must earn on its existing assets to maintain the value of its stock.C. rate the firm should expect to pay on its next bond issue.D. maximum rate which the firm should require on any projects it undertakes.E. rate of return that the firm's preferred stockholders should expect to earn over the long term. Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: DEFINITIONS6. The WACC is used to _______ the expected cash flows when the firm has ____________.A. discount; debt and equity in the capital structureB. discount; short term financing on the balance sheetC. increase; debt and equity in the capital structureD. decrease; short term financing on the balance sheetE. None of the above.Difficulty level: MediumTopic: WACCType: CONCEPTS7. Using the CAPM to calculate the cost of capital for a risky project assumes that:A. using the firm's beta is the same measure of risk as the project.B. the firm is all-equity financed.C. the financial risk is equal to business risk.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: CAPMType: CONCEPTS8. The use of WACC to select investments is acceptable when the:A. correlation of all new projects are equal.B. NPV is positive when discounted by the WACC.C. risk of the projects are equal to the risk of the firm.D. firm is well diversified and the unsystematic risk is negligible.E. None of the above.Difficulty level: EasyTopic: WACCType: CONCEPTS9. If the risk of an investment project is different than the firm's risk then:A. you must adjust the discount rate for the project based on the firm's risk.B. you must adjust the discount rate for the project based on the project risk.C. you must exercise risk aversion and use the market rate.D. an average rate across prior projects is acceptable because estimates contain errors.E. one must have the actual data to determine any differences in the calculations. Difficulty level: EasyTopic: DISCOUNT RATEType: CONCEPTS10. If the project beta and IRR coordinates plot above the SML the project should be:A. accepted.B. rejected.C. It is impossible to tell.D. It will depend on the NPV.E. None of the above.Difficulty level: MediumTopic: SECURITY MARKET LINEType: CONCEPTS11. The beta of a security provides an:A. estimate of the market risk premium.B. estimate of the slope of the Capital Market Line.C. estimate of the slope of the Security Market Line.D. estimate of the systematic risk of the security.E. None of the above.Difficulty level: EasyTopic: BETAType: CONCEPTS12. Regression analysis can be used to estimate:A. beta.B. the risk-free rate.C. standard deviation.D. variance.E. expected return.Difficulty level: EasyTopic: BETA ESTIMATIONType: CONCEPTS13. Beta measures depend highly on the:A. direction of the market variance.B. overall cycle of the market.C. variance of the market and asset, but not their co-movement.D. covariance of the security with the market and how they are correlated.E. All of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.A. variance; covarianceB. covariance; varianceC. standard deviation; varianceD. expected return; varianceE. expected return; covarianceDifficulty level: MediumTopic: BETAType: CONCEPTS15. The slope of the characteristic line is the estimated:A. intercept.B. beta.C. unsystematic risk.D. market variance.E. market risk premium.Difficulty level: MediumTopic: BETA AND CHARACTERISTIC LINEType: CONCEPTS16. Companies that have highly cyclical sales will have a:A. low beta if sales are highly dependent on the market cycle.B. high beta if sales are highly dependent on the market cycle.C. high beta if sales are independent of the market cycle.D. All of the above.E. None of the above.Difficulty level: MediumTopic: CYCLICAL BUSINESS AND BETAType: CONCEPTS17. Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on:A. how small the estimation errors are of all betas across industries.B. how similar the firm's operations are to the operations of all other firms in the industry.C. whether the company is a leader or follower.D. the size of the company's public float.E. None of the above.Difficulty level: MediumTopic: INDUSTRY OR FIRM BETAType: CONCEPTS18. Beta is useful in the calculation of the:A. company's variance.B. company's discount rate.C. company's standard deviation.D. unsystematic risk.E. company's market rate.Difficulty level: MediumTopic: BETAType: CONCEPTS19. For a multi-product firm, if a project's beta is different from that of the overall firm, then the:A. CAPM can no longer be used.B. project should be discounted using the overall firm's beta.C. project should be discounted at a rate commensurate with its own beta.D. project should be discounted at the market rate.E. project should be discounted at the T-bill rate.Difficulty level: MediumTopic: PROJECT AND FIRM BETAType: CONCEPTS20. The problem of using the overall firm's beta in discounting projects of different risk is the:A. firm would accept too many high-risk projects.B. firm would reject too many low risk projects.C. firm would reject too many high-risk projects.D. firm would accept too many low risk projects.E. Both A and B.Difficulty level: MediumTopic: FIRM'S BETAType: CONCEPTS21. The asset beta of a levered firm is generally:A. equal to the equity beta.B. different from the equity beta.C. different from the debt beta.D. the simple average of the equity beta and debt beta.E. Both B and C.Difficulty level: MediumTopic: ASSET BETAType: CONCEPTS22. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.A. equal toB. significantly lessC. slightly lessD. greaterE. None of the above.Difficulty level: MediumTopic: LEVERED VS. UNLEVERED BETAType: CONCEPTS23. The beta of a firm is determined by which of the following firm characteristics?A. Cycles in revenuesB. Operating leverageC. Financial leverageD. All of the above.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS24. The beta of a firm is more likely to be high under what two conditions?A. High cyclical business activity and low operating leverageB. High cyclical business activity and high operating leverageC. Low cyclical business activity and low financial leverageD. Low cyclical business activity and low operating leverageE. None of the above.Difficulty level: MediumTopic: FACTORS AFFECTING BETAType: CONCEPTS25. A firm with cyclical earnings is characterized by:A. revenue patterns that vary with the business cycle.B. high levels of debt in its capital structure.C. high fixed costs.D. high price per unit.E. low contribution margins.Difficulty level: MediumTopic: CYCLICAL EARNINGSType: CONCEPTS26. A firm with high operating leverage has:A. low fixed costs in its production process.B. high variable costs in its production process.C. high fixed costs in its production process.D. high price per unit.E. low price per unit.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS27. If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:A. a smaller change in EBIT for the firm versus the other firms.B. no effect in any way on the firms as volume does not effect fixed costs.C. a decreasing effect on the cyclical nature of the business.D. a larger change in EBIT for the firm versus the other firms.E. None of the above.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS28. A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________.A. low fixed cost of production; low fixed financial costsB. high variable cost of production; high variable financial costsC. high fixed costs of production; high fixed financial costsD. low costs of production; high fixed financial costsE. high fixed costs of production; low variable financial costsDifficulty level: MediumTopic: OPERATING AND FINANCIAL LEVERAGEType: CONCEPTS29. Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:A. low betas.B. high betas.C. zero betas.D. negative betas.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS30. An industry is likely to have a low beta if the:A. stream of revenues is stable and less volatile than the market.B. economy is in a recession.C. market for its goods is unaffected by the market cycle.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS31. For the levered firm the equity beta is __________ the asset beta.A. greater thanB. less thanC. equal toD. sometimes greater than and sometimes less thanE. None of the above.Difficulty level: MediumTopic: ASSET AND EQUITY BETASType: CONCEPTS32. All else equal, a more liquid stock will have a lower ________.A. betaB. market premiumC. cost of capitalD. Both A and B.E. Both A and C.Difficulty level: ChallengeTopic: LIQUIDITYType: CONCEPTS33. Two stock market based costs of liquidity that affects the cost of capital are the:A. bid-ask spread and the specialist spread.B. market impact cost and the brokerage costs.C. investor opportunity cost and the brokerage costs.D. bid-ask spread and the market impact costs.E. None of the above.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS34. When a specialist is caught in the middle of a trade between informed and uniformed traders, which effectively eliminates the spread or causes a loss, is subject to:A. market impact costs.B. adverse selection.C. broker's quotation bias.D. increasing the number of uninformed traders.E. None of the above.Difficulty level: ChallengeTopic: ADVERSE SELECTIONType: CONCEPTS35. All else equal, new shareholders will ____ the capital gains of existing shareholders.A. diluteB. hold constantC. increaseD. All of the aboveE. It is impossible to tell.Difficulty level: MediumTopic: CAPITAL GAINSType: CONCEPTS36. The following are methods to estimate the market risk premium:A. use historical data to estimate future risk premium.B. use the dividend discount model to estimate risk premium.C. use the bond valuation model to estimate growth in bond prices with different costs of capital.D. A and B.E. A and C.Difficulty level: MediumTopic: MARKET RISK PREMIUMType: CONCEPTS37. Beta is the slope of the:A. efficient frontier.B. market portfolio.C. security market line.D. characteristic line.E. None of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS38. Two stocks that have the same beta ____ have the same correlation because _______:A. may; because correlation measures the sensitivity of the S&P to the market portfolio.B. will; because correlation measures the tightness of fit around the regression line.C. may not; because correlation measures the tightness of fit around the regression line.D. may not; because correlation measures the sensitivity to change.E. None of the above.Difficulty level: MediumTopic: BETA AND CORRELATIONType: CONCEPTS39. When using the cost of debt, the relevant number is the:A. pre-tax cost of debt since most corporations pay taxes at the same tax rate.B. pre-tax cost of debt since it is the actual rate the firm is paying bondholders.C. post-tax cost of debt since dividends are tax deductible.D. post-tax cost of debt since interest is tax deductible.E. None of the above.Difficulty level: MediumTopic: COST OF DEBTType: CONCEPTS40. Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital?A. 7.10%B. 7.39%C. 10.38%D. 10.65%E. 11.37%R e = .04 + (1.1 ⨯ .08) = .128Debt: 80,000 ⨯ $1,000 = $80mCommon: 4m ⨯ $40 = $160mTotal = $80m + $160m = $240mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS41. Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop?A. 6.14%B. 6.54%C. 8.60%D. 9.14%E. 9.45%Debt: $500,000 ⨯ 1.02 = $.51mPreferred: 40,000 ⨯ $34 = $1.36mCommon: 104,000 ⨯ $20 = $2.08mTotal = $.51m + $1.36m + $2.08m = $3.95mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS42. Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9%. The firm has an after-tax cost of debt of 5% and a cost of equity of 11%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?A. .33B. .40C. .50D. .60E. .67.09 = [W e⨯ .11] + [(1 - W e) ⨯ .05) = .11W e + .05 - .05W e; .04 = .06W e; W e = 66.67%; W d = 1 - W e = 100% - 66.67% = 33.33%; Debt - equity ratio = 33.33% ÷ 66.67% = .50Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS43. Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?A. 5.3%B. 5.8%C. 6.3%D. 6.9%E. 7.2%Debt: 6,000 ⨯ $1,000 ⨯ .99 = $5.94mCommon: 210,000 ⨯ $36 = $7.56mTotal = $5.94m + $7.56m = $13.50mR e = [($1.593 ⨯ 1.04) ÷ $36] + .04 = .08602Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS44. The Consolidated Transfer Co. is an all-equity financed firm. The beta is .75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Consolidated?A. 7%B. 8%C. 9%D. 10%E. 13%.04 + 0.75(.08) = .10 = 10%Difficulty level: EasyTopic: CAPMType: PROBLEMS45. Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?A. 10.4%B. 10.8%C. 12.8%D. 14.4%E. None of the above.Rs = Rf + β(Rm - Rf) = .02 + 1.2(.09 - .02) = .104 = 10.4%Difficulty level: MediumTopic: CAPMType: PROBLEMS46. The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is ___.A. 0.48B. 0.68C. 1.25D. 1.68E. Impossible to calculate with information given.Rs = Rf + β (Rm - Rf); .084 = .05 + β (.10 - .05); β = .68Difficulty level: MediumTopic: EQUITY BETAType: PROBLEMS47. Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, the expected return on Simmons' common stock is:A. 4.0%.B. 5.0%.C. 5.6%.D. 10.6%.E. 11.4%.Rs = Rf + β(Rm - Rf) = .05 + 1.6(.04) = .114 = 11.4%Difficulty level: EasyTopic: CAPMType: PROBLEMS48. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is ______.A. 1.00B. 1.17C. 1.20D. 2.50E. It is impossible to calculate with the information given.Rs = Rf + β(Rm - Rf); .12 = .05 + β(.06); β = .07/.06 = 1.17Difficulty level: MediumTopic: CALCULATING BETAType: PROBLEMS49. Slippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is its asset beta?A. 0.40B. 0.72C. 1.20D. 1.80E. None of the aboveβA = (E/(D + E.) βE = (1/3)(1.2) = .40Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS50. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta?A. 0.70B. 0.72C. 0.96D. 1.04E. 1.05.8(.6/1.6) + 1.2(1/1.6) = 1.05Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS51. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is:A. 8.65%B. 9%C. 9.47%D. 10.5%E. 13%WACC = .09(1 - .34)(.5) + .13(.5) = .0297 + .065 = .0947 = 9.47%Difficulty level: EasyTopic: WACCType: PROBLEMSEssay Questions。
(完整word版)罗斯公司理财题库全集(word文档良心出品)
Chapter 21Leasing Multiple Choice Questions1. In a lease arrangement, the owner of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.2. In a lease arrangement, the user of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.3. Which of the following would not be a characteristic of a financial lease?A. They are not usually fully amortized.B. They usually do not have maintenance necessary for the leased assets.C. They usually do not include a cancellation option.D. The lessee usually has the right to renew the lease at expiration.E. All of the above are characteristics of financial leases.4. An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.A. leveraged; directB. sales and leaseback; sales-typeC. capital; sales-typeD. direct; sales-typeE. None of the above5. Which of the following is not a financial lease?A. A leveraged leaseB. An operating leaseC. A sale-and-leasebackD. Both A and B.E. None of the above.6. If the lessor borrows much of the purchase price of a leased asset, the lease is called:A. a leveraged lease.B. a sale-and-leaseback.C. a capital lease.D. a nonrecourse lease.E. None of the above.7. An operating lease's primary characteristics are:A. fully amortized, lessee maintains equipment and there is no cancellation clause.B. not fully amortized, lessor maintains equipment and there is a cancellation clause.C. fully amortized, lessor maintains equipment and there is a cancellation clause.D. not fully amortized, lessor maintains equipment and there is not cancellation clause.E. fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market value.8. If a lease is for 35 years, it is regarded as a:A. financial lease.B. operating lease.C. capital lease.D. conditional sale.E. sale and leaseback.9. The city of Oakland sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:A. an operating lease.B. a short-term lease.C. a sale and leaseback.D. a fully amortized lease.E. None of the above.10. A financial lease has the following as its primary characteristics:A. is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause.B. is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause.C. is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause.D. is not fully amortized, lessor maintains equipment and there is a renewal clause.E. is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clause.11. An advantage of leasing is that the lessor does not own the asset and can cancel:A. only financial leases.B. only operating leases.C. only capital leases.D. any kind of leases anytime.E. None of the above.12. A leveraged lease typically involves a non-recourse loan in which:A. the lessee's payments go directly to the lender in case of default.B. the lessor is not obligated in case of default.C. the third party lenders have a first lien on the assets.D. All of the above.E. None of the above.13. For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?A. The lessee can purchase the asset below fair market value at the end of the lease.B. The lease transfers ownership of the asset to the lessee by the end of the lease.C. The lease term is more than 75% of the asset's economic life.D. The present value of the lease payments is more than 90% of the asset's market value at lease inception.E. All of the above would lead to the lease being considered a capital lease.14. Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?A. Capital leases do not have to be put on the balance sheet; only financial leases do.B. Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement.C. Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000.D. Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement.E. None of the above.15. Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:A. capital leases appear financially stronger than firms that used debt to purchase the asset.B. operating leases appear financially stronger than firms that used debt to purchase the asset.C. leases of any type appear financially stronger than firms that used debt to purchase the asset.D. All of the above.E. None of the above.16. Which of the following is not an implication of FASB 13, Accounting for Leases?A. FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet.B. FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet.C. FASB 13 allows for off-balance-sheet financing for operating leases.D. All of the above.E. None of the above.17. The reason the IRS is most concerned about lease contracts is:A. firms that lease generally pay no taxes.B. that leasing usually leads to bankruptcy.C. that leases can be set up solely to avoid taxes.D. because leasing leads to off-balance-sheet-financing.E. All of the above.18. A lease with high payments early in its life which then decline to termination would:A. provide greater cash flow to the lessee in the beginning years.B. be evidence of tax avoidance and not acceptable to the IRS.C. be qualified as a capital lease under FASB 13.D. provide a lower residual value and thus ensure a bargain-purchase price option.E. All of the above.19. In valuing the lease versus purchase option, the relevant cash flows are the:A. tax shield from depreciation.B. investment outlay for the equipment.C. a decrease in the firm's operating costs that are not affected by leasing.D. All of the above are relevant.E. None of the above are relevant.20. The appropriate discount rate for valuing a financial lease is:A. the firm's after-tax weighted average cost of capital.B. the after-tax required return on assets of risks similar to the leased asset.C. the after-tax cost of secured borrowing.D. Either A or B.E. All of the above.21. The WACC is not used in the lease versus purchase decision because:A. the WACC was used in the decision to acquire the asset, this is only a financing decision.B. the WACC is used only when a lease alone is considered and not a lease versus purchase.C. the WACC does not include the lease cost of capital and therefore should not be used.D. tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.E. when a bank arranges a lease they do not consider the lessee's cost of capital.22. Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because:A. lenders are concerned about the firm's total liabilities and related cash flow.B. debt displacement occurs with leasing.C. less future debt can be raised for a growing firm when a lease is used.D. All of the above.E. None of the above.23. ______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose.A. Early balloon paymentsB. Late balloon paymentsC. Capitalizing a leaseD. Transfer of lease payments to a second ownerE. None of the above24. Debt displacement is associated with leases because:A. all assets not purchased with equity use debt financing.B. debt is always a cheaper source of financing and preferred to equity financing.C. FASB 13 and the IRS mandate debt displacement.D. lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.E. None of the above.25. A lease is likely to be most beneficial to both parties when:A. the lessor's tax rate is lower than the lessee's.B. the lessor's tax rate is higher than the lessee's.C. the lessor's tax rate is equal to the lessee's.D. a lease cannot be beneficial to both parties.E. a lease always has zero NPV, so both parties always break even.26. The price or lease payment that the lessee sets as their bound is known as:A. the present value of the tax shields.B. the reservation payment, L MIN.C. the present value of operating savings.D. the reservation payment, L MAX.E. None of the above.27. Which of the following is probably not a good reason for leasing instead of buying?A. Taxes may be reduced by leasing.B. Leasing may reduce transactions costs.C. Leasing may provide a beneficial reduction of uncertainty.D. All of the above are good reasons.E. All of the above are not good reasons.28. Which of the following is probably a good reason for leasing instead of buying?A. Leasing provides 100% financing.B. Leasing is not considered a form of debt financing.C. Leasing may increase EPS relative to buying.D. All of the above are good reasons.E. None of the above is a good reason.29. Some assets are leased more than others because:A. the value of the asset under a lease is not highly affected by term of use or maintenance decisions.B. a lease may be used to fool clients into "buying" high priced assets above market value.C. leasing allows sellers to attract clients with low prices as the basis for setting the contract.D. Both A and B.E. Both A and C.30. To meet IRS guidelines for leasing, the lease should:A. limit the lessee's right to issue debt or pay dividends while the lease is operative.B. not limit the lessee's right to issue debt or pay dividends while the lease is operative.C. pay a very high return to the lessor.D. transfer ownership of the asset at the end of the lease at below fair market value.E. be over 30 years.Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%.31. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-9?A. $-255B. $-955C. $-1,295D. $-1,850E. None of the above32. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?A. $-4,865B. $-700C. $6,950D. $7,650E. None of the above33. What is the NPV of the lease relative to the purchase?A. $-1,039.78B. $339.78C. $360.22D. $6,610.22E. None of the above34. What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?A. $-605B. $-955C. $-1,455D. $-1,305E. None of the above35. This lease would be classified as a(n):A. operating lease because the asset will be obsolete.B. operating lease because there is no amortization.C. leveraged lease because it is being financed.D. capital lease because the lease life is greater than 75% of the economic life.E. sale and leaseback because the company gets full use of the asset.Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%.36. What is the appropriate discount rate for valuing the lease?A. 2.72%B. 5.28%C. 8.00%D. 12.12%E. None of the above.37. What is the after-tax cash flow from leasing in year 0?A. $300,000B. $495,000C. $852,000D. $948,000E. None of the above38. What is the after-tax cash flow in years 1 through 5?A. $-126,600B. $-198,000C. $-269,400D. $-287,250E. None of the above39. What is the NPV of the lease?A. $-111,690B. $-295,040C. $-305,388D. $-309,690E. None of the above40. What is the maximum lease payment that you would be willing to make?A. $170,655B. $175,000C. $187,842D. $210,307E. None of the above41. What is the minimum lease payment that the lessor would be willing to accept?A. $161,000B. $176,995C. $217,645D. $237,083E. None of the aboveYour firm is considering leasing a new laser light. The lease lasts for 3 years. The lease calls for 4 payments of $10,000 per year with the first payment occurring immediately. The computer would cost $45,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 10%. The corporate tax rate is 35%.42. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3?A. $-32,775B. $-11,750C. $-1,750D. $-1,850E. None of the above43. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?A. $-35,000B. $-38,500C. $35,000D. $38,500E. None of the above44. What is the NPV of the lease relative to the purchase?A. $-6,500B. $7,380C. $4,678D. $12,400E. None of the above45. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)?A. $-11,750B. $11,750C. $12,400D. $-12,400E. None of the above46. This lease would be classified as a(n):A. operating lease because the asset will be obsolete.B. operating lease because there is no amortization.C. leveraged lease because it is being financed.D. capital lease because the lease life is greater than 75% of the economic life.E. sale and leaseback because the company gets full use of the asset.Essay Questions47. Sardinas Sardines has assets valued at $10 million and equity of $10 million. The firm recently leased new equipment worth $1 million. Present the balance sheet under two conditions; the lease is judged to be an operating lease, and the lease is judged to be a capital lease.48. The Blank Button Company is considering the purchase of a new machine for $30,000. The machine is expected to save the firm $12,500 per year in operating costs over a 5 year period, and can be depreciated on a straight-line basis to a zero salvage value over its life. Alternatively, the firm can lease the machine for $6,500 per year for 5 years, with the first payment due in 1 year. The firm's tax rate is 34%, and its cost of debt is 10%. Calculate the NPV of the lease versus the purchase decision. Calculate the reservation payment of the lessee.49. The Plastic Iron Company has decided to acquire a new electronic milling machine. Plastic Iron can purchase the machine for $87,000 which has an expected life of 8 years and will be depreciated using 7 class MACRS rates of .1428, .2449, .1749, .125, .0892, .0892, .0892 and any remainder in year 8. Miller Leasing has offered to lease the machine to Plastic Iron for $14,000 a year for 8 years. Plastic Iron has an 18.64% cost of equity, 12% cost of debt, a 1:1 D/E ratio and faces a 34% marginal tax rate. Should they lease or buy? Show all work.50. What are some of the advantages and disadvantages of leasing?Chapter 21 Leasing Answer KeyMultiple Choice Questions1. In a lease arrangement, the owner of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.Difficulty level: EasyTopic: LESSORType: DEFINITIONS2. In a lease arrangement, the user of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.Difficulty level: EasyTopic: LESSEEType: DEFINITIONS3. Which of the following would not be a characteristic of a financial lease?A. They are not usually fully amortized.B. They usually do not have maintenance necessary for the leased assets.C. They usually do not include a cancellation option.D. The lessee usually has the right to renew the lease at expiration.E. All of the above are characteristics of financial leases.Difficulty level: MediumTopic: FINANCIAL LEASEType: DEFINITIONS4. An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.A. leveraged; directB. sales and leaseback; sales-typeC. capital; sales-typeD. direct; sales-typeE. None of the aboveDifficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS5. Which of the following is not a financial lease?A. A leveraged leaseB. An operating leaseC. A sale-and-leasebackD. Both A and B.E. None of the above.Difficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS6. If the lessor borrows much of the purchase price of a leased asset, the lease is called:A. a leveraged lease.B. a sale-and-leaseback.C. a capital lease.D. a nonrecourse lease.E. None of the above.Difficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS7. An operating lease's primary characteristics are:A. fully amortized, lessee maintains equipment and there is no cancellation clause.B. not fully amortized, lessor maintains equipment and there is a cancellation clause.C. fully amortized, lessor maintains equipment and there is a cancellation clause.D. not fully amortized, lessor maintains equipment and there is not cancellation clause.E. fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market value.Difficulty level: MediumTopic: OPERATING LEASEType: DEFINITIONS8. If a lease is for 35 years, it is regarded as a:A. financial lease.B. operating lease.C. capital lease.D. conditional sale.E. sale and leaseback.Difficulty level: MediumTopic: TYPES OF LEASESType: DEFINITIONS9. The city of Oakland sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:A. an operating lease.B. a short-term lease.C. a sale and leaseback.D. a fully amortized lease.E. None of the above.Difficulty level: EasyTopic: TYPES OF LEASEType: CONCEPTS10. A financial lease has the following as its primary characteristics:A. is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause.B. is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause.C. is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause.D. is not fully amortized, lessor maintains equipment and there is a renewal clause.E. is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clause.Difficulty level: EasyTopic: FINANCIAL LEASEType: CONCEPTS11. An advantage of leasing is that the lessor does not own the asset and can cancel:A. only financial leases.B. only operating leases.C. only capital leases.D. any kind of leases anytime.E. None of the above.Difficulty level: EasyTopic: ADVANTAGE TO LEASINGType: CONCEPTS12. A leveraged lease typically involves a non-recourse loan in which:A. the lessee's payments go directly to the lender in case of default.B. the lessor is not obligated in case of default.C. the third party lenders have a first lien on the assets.D. All of the above.E. None of the above.Difficulty level: MediumTopic: LEVERAGED LEASEType: CONCEPTS13. For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?A. The lessee can purchase the asset below fair market value at the end of the lease.B. The lease transfers ownership of the asset to the lessee by the end of the lease.C. The lease term is more than 75% of the asset's economic life.D. The present value of the lease payments is more than 90% of the asset's market value at lease inception.E. All of the above would lead to the lease being considered a capital lease.Difficulty level: MediumTopic: CAPITAL LEASEType: CONCEPTS14. Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?A. Capital leases do not have to be put on the balance sheet; only financial leases do.B. Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement.C. Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000.D. Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement.E. None of the above.Difficulty level: EasyTopic: CAPITAL LEASEType: CONCEPTS15. Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:A. capital leases appear financially stronger than firms that used debt to purchase the asset.B. operating leases appear financially stronger than firms that used debt to purchase the asset.C. leases of any type appear financially stronger than firms that used debt to purchase the asset.D. All of the above.E. None of the above.Difficulty level: ChallengeTopic: FASB 13Type: CONCEPTS16. Which of the following is not an implication of FASB 13, Accounting for Leases?A. FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet.B. FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet.C. FASB 13 allows for off-balance-sheet financing for operating leases.D. All of the above.E. None of the above.Difficulty level: MediumTopic: FASB 13Type: CONCEPTS17. The reason the IRS is most concerned about lease contracts is:A. firms that lease generally pay no taxes.B. that leasing usually leads to bankruptcy.C. that leases can be set up solely to avoid taxes.D. because leasing leads to off-balance-sheet-financing.E. All of the above.Difficulty level: EasyTopic: TAX IMPLICATIONSType: CONCEPTS18. A lease with high payments early in its life which then decline to termination would:A. provide greater cash flow to the lessee in the beginning years.B. be evidence of tax avoidance and not acceptable to the IRS.C. be qualified as a capital lease under FASB 13.D. provide a lower residual value and thus ensure a bargain-purchase price option.E. All of the above.Difficulty level: MediumTopic: TAX IMPLICATIONSType: CONCEPTS19. In valuing the lease versus purchase option, the relevant cash flows are the:A. tax shield from depreciation.B. investment outlay for the equipment.C. a decrease in the firm's operating costs that are not affected by leasing.D. All of the above are relevant.E. None of the above are relevant.Difficulty level: MediumTopic: LEASE VS. BUYType: CONCEPTS20. The appropriate discount rate for valuing a financial lease is:A. the firm's after-tax weighted average cost of capital.B. the after-tax required return on assets of risks similar to the leased asset.C. the after-tax cost of secured borrowing.D. Either A or B.E. All of the above.Difficulty level: EasyTopic: APPROPRIATE DISCOUNT RATEType: CONCEPTS21. The WACC is not used in the lease versus purchase decision because:A. the WACC was used in the decision to acquire the asset, this is only a financing decision.B. the WACC is used only when a lease alone is considered and not a lease versus purchase.C. the WACC does not include the lease cost of capital and therefore should not be used.D. tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.E. when a bank arranges a lease they do not consider the lessee's cost of capital.Difficulty level: ChallengeTopic: APPROPRIATE DISCOUNT RATEType: CONCEPTS22. Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because:A. lenders are concerned about the firm's total liabilities and related cash flow.B. debt displacement occurs with leasing.C. less future debt can be raised for a growing firm when a lease is used.D. All of the above.E. None of the above.Difficulty level: MediumTopic: FINANCIAL LEASEType: CONCEPTS23. ______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose.A. Early balloon paymentsB. Late balloon paymentsC. Capitalizing a leaseD. Transfer of lease payments to a second ownerE. None of the aboveDifficulty level: MediumTopic: TAX IMPLICATIONSType: CONCEPTS24. Debt displacement is associated with leases because:A. all assets not purchased with equity use debt financing.B. debt is always a cheaper source of financing and preferred to equity financing.C. FASB 13 and the IRS mandate debt displacement.D. lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.E. None of the above.Difficulty level: ChallengeTopic: LEASES AND DEBTType: CONCEPTS25. A lease is likely to be most beneficial to both parties when:A. the lessor's tax rate is lower than the lessee's.B. the lessor's tax rate is higher than the lessee's.C. the lessor's tax rate is equal to the lessee's.D. a lease cannot be beneficial to both parties.E. a lease always has zero NPV, so both parties always break even.Difficulty level: ChallengeTopic: TAX IMPLICATIONSType: CONCEPTS26. The price or lease payment that the lessee sets as their bound is known as:A. the present value of the tax shields.B. the reservation payment, L MIN.C. the present value of operating savings.D. the reservation payment, L MAX.E. None of the above.Difficulty level: MediumTopic: RESERVATION PAYMENTType: CONCEPTS27. Which of the following is probably not a good reason for leasing instead of buying?A. Taxes may be reduced by leasing.B. Leasing may reduce transactions costs.C. Leasing may provide a beneficial reduction of uncertainty.D. All of the above are good reasons.E. All of the above are not good reasons.Difficulty level: MediumTopic: REASON FOR LEASINGType: CONCEPTS。
罗斯公司理财题库全集
Chapter 23 Options and Corporate Finance: Extensions and Applications Answer KeyMultiple Choice Questions1. The option to abandon is:A. a real option.ually of little value because of the cost associated with abandonment.C.irrelevant in capital budgeting analysis.D.nearly always less relevant the option to expand.E.All of the above.Difficulty level: MediumTopic: OPTION TO ABANDONType: DEFINITIONS2. An example of a special option is:A.an executive stock option.B.the embedded option in a start-up company.C.the option in simple business contracts.D.the option to shut down and reopen a project.E.All of the above.Difficulty level: MediumTopic: SPECIAL OPTIONType: DEFINITIONS3. Executives can not exercise their options for a fixed period of time. This is the:A.investing period.B.freeze-out period.C.valuation period.D.guaranteed growth period.E.strike period.Difficulty level: MediumTopic: FREEZE-OUT PERIODType: DEFINITIONS4. The NPV approach must be:A.augmented by added analysis if there are a few embedded options.B.augmented by added analysis if a decision has significant embedded options.C.jettisoned if there are any embedded options.puted carefully to identify the options.E.None of the above.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS5. Options are granted to top corporate executives because:A.executives will make better business decisions in line with benefiting the shareholders.B.executive pay is at risk and linked to firm performance.C.options are tax-efficient and taxed only when they are exercised.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS6. The call option on a dividend paying stock compared to a non-dividend paying stock is:A.more valuable because of the extra dividend payment.B.equal in value because cash dividends are paid on stock only.C.less valuable because cash dividends are paid on stock only.D.less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.E.None of the above.Difficulty level: ChallengeTopic: CALL OPTION ON DIVIDEND PAYING STOCKType: CONCEPTS7. The value of the options awarded executives is much less than face value to the executives because:A.the value to the executive depends on the stock price being greater than the exercise price.B.the options must be held beyond the freeze-out period.C. a highly undiversified portfolio can have a large drop in value with high variance stocks.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS8. By rewarding executives with large option positions, corporations:A.cause the executives to hold highly undiversified portfolios.B.put the firm in a risky position to pay off the options.C.cause the value of the stock to fall because the options are theft.D.are really valueless because most options are never exercised.E.None of the above.Difficulty level: ChallengeTopic: EXECUTIVE OPTIONSType: CONCEPTS9. Investing in a negative NPV project today is a feasible choice if:A.there are future option alternatives.B.investing is sequentially limited.C.the discount rate is low.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: NEGATIVE NPV PROJECTS AND REAL OPTIONSType: CONCEPTS10. The opportunity to defer investing to a later date may have value because:A.the cost of capital may decline in the near future.B.certainty may be reduced in the future.C.investment costs fluctuate in time.D.All of the above.E.None of the above.Difficulty level: EasyTopic: OPTION TO DEFERType: CONCEPTS11. Rejecting an investment today forever may not be a good choice because:A.the size of the firm will decline.B.there are always errors in the estimation of NPVs.C.the option value is negative.D.the company's foregoing the future rights or option to the investment.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS12. A financial manager who does not follow the general constraints of the NPV rule may:A.accept a negative NPV project for fear of losing an investment opportunity.B.accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.C.not consider all options available in a capital budgeting decision.D.not take a positive NPV project even if the NPV is adequate reward to forego the option.E.All of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS13. The volatility of interest rates can affect the value of the project by:A.increasing the value as volatility increases.B.increasing the value as volatility decreases.C.decreasing the value as volatility increases.D.interest rate volatility does not affect value.E.None of the above.Difficulty level: MediumTopic: INTEREST RATE VOLATILITYType: CONCEPTS14. Which of the following statements is true?A.The Black Scholes model is the simplest to use and best used for complex situations.B.The binomial model does not handle options with dividend payments prior to expiration date.C.The Black Scholes model adequately handles the valuation of an American put.D.The binomal model is better for complex situations and is the simplest tool to use.E.The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool.Difficulty level: MediumTopic: OPTION PRICING TOOLSType: CONCEPTS15. If a project has optionality:A.the shorter the available life of the project the less valuable the project is.B.the longer the available life of the project the less valuable the project is.C.the shorter the available life of the project the more valuable the project is.D.available project life does not change optionality.E.None of the above.Difficulty level: EasyTopic: OPTIONALITYType: CONCEPTS16. The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable if:A.there is a constant variability.B.any new information impacting prices is similar period to period.C.interest or discount rates are constant.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: VARIABILITY AND INFORMATIONType: CONCEPTS17. The most correct method to determine the current value of future payoffs would be to:A.take the discounted expected value at the risk-free rate.B.take the expected value using the probabilities.C.take the discounted expected value using the risk-neutral probabilities and the risk free rate.D.sum the payoffs discounted at the risk free rate.E.None of the above.Difficulty level: MediumTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS18. The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:A.given by the probability of each state occurring.B.given by the value of the underlying asset under good news and the risk free rate.C.given by the value of the underlying asset under good news and bad news.D.given by the value of the underlying asset under good news, bad news, and the risk free rate.E.None of the above.Difficulty level: ChallengeTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS19. A branching tree for the binomial model:A.should capture all possible futures paths for the asset.B.has a move down followed by a move up on a subsequent branch to end at the same value as the reverse path.C.has a move down followed by a move up on a subsequent branch to end at a lower value than a move up then a move down.D.Both A and C.E.Both A and B.Difficulty level: ChallengeTopic: BINOMIAL MODELType: CONCEPTS20. Increasing the number of intervals in the binomial model causes the price shift parameters to change. New estimates are related to:A.the standard deviation of the underlying asset.B.the up state multiplier equals the standard deviation divided by root n.C.the number of intervals in a year.D.All of the above.E.None of the above.Difficulty level: MediumTopic: BINOMIAL MODELType: CONCEPTS21. Which of the following is not part of the Black Scholes option pricing model?A.Standard deviationB.Time to maturityC.Exercise priceD.Par value of the company's stockE.Interest rateDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS22. What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38?A. 1.1159; .8961B..0317; 31.5789C..0317; .9683D..2193; .7807E.None of the aboveDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS23. On the notion of embedded options, which of the following is/are true?A.If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation.B.There are at least two possible outcomes for virtually every business idea.C.Virtually every business has both the option to abandon and the option to expand.D.All of the above.E.Both B and C.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS24. A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value. This value can be primarily attributed to:A.the potential sale of the company.B.the low exercise price held by the shareholders.C.the option to open the facility when prices rise dramatically.D.All of the above.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTSNote: Correct answers to later questions are dependent on correct answers to earlier questions.Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 4%.25. What is d?1A..1842B..4102C..4583D..4909E..5412= [ln(22/22) + [.04 + (.50x.07)(3)]/ (.07)3 d1= .225/.4583 = .4909d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS26. What is d2?A..0121B..0252C..0326D..0452E..0525d 2 = d1- √σ2t = .4909 - √(.07)(3) = .4909 - .4583 = .0326Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS27. What is e-rt?A..6087B..7087C..7952D..8476E..8869e-.04(3) = .8869Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS28. Calculate N(d).1A..5054B..6508C..6882D..7047E..8096) = .50 + .1882 = .6882 N(d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS29. Calculate N(d).2A..5130B..5578C..6085D..7085E..7142) = .50 + .0130 = .5130N(d2Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS30. What is the value of a call option?A.$4.14B.$4.86C.$5.13D.$5.62E.$6.16。
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Chapter 18Valuation and Capital Budgeting for the Levered Firm Multiple Choice Questions1. The flow-to-equity (FTE) approach in capital budgeting is defined to be the:A. discounting all cash flows from a project at the overall cost of capital.B. scale enhancing discount process.C. discounting of the levered cash flows to the equity holders for a project at the required return on equity.D. dividends and capital gains that may flow to a shareholders of any firm.E. discounting of the unlevered cash flows of a project from a levered firm at the WACC.2. The acronym APV stands for:A. applied present value.B. all purpose variable.C. accepted project verified.D. adjusted present value.E. applied projected value.3. A leveraged buyout (LBO) is when a firm is acquired by:A. a small group of management with equity financing.B. a small group of equity investors financing the majority of the price by debt.C. any group of equity investors when the majority is financed with preferred stock.D. any group of investors for the assets of the corporation.E. None of the above.4. Discounting the unlevered after tax cash flows by the _____ minus the ______ yields the ________.A. cost of capital for the unlevered firm; initial investment; adjusted present value.B. cost of equity capital; initial investment; project NPV.C. weighted cost of capital; fractional equity investment; project NPV.D. cost of capital for the unlevered firm; initial investment; all-equity net present value.E. None of the above.5. The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This may result in:A. firms rejecting positive NPV, all equity projects because changing to a capital structure with debt will always create negative NPV.B. never considering capital budgeting projects on their own merits.C. corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing the project.D. firms accepting some negative NPV all equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV.E. firms never changing the capital structure because all capital budgeting decisions will be subsumed by capital structure decisions.6. The APV method is comprised of the all equity NPV of a project and the NPV of financing effects. The four side effects are:A. tax subsidy of dividends, cost of issuing new securities, subsidy of financial distress and cost of debt financing.B. cost of issuing new securities, cost of financial distress, tax subsidy of debt and other subsidies to debt financing.C. cost of issuing new securities, cost of financial distress, tax subsidy of dividends and cost of debt financing.D. subsidy of financial distress, tax subsidy of debt, cost of other debt financing and cost of issuing new securities.E. None of the above.7. In calculating the NPV using the flow-to-equity approach the discount rate is the:A. all equity cost of capital.B. cost of equity for the levered firm.C. all equity cost of capital minus the weighted average cost of debt.D. weighted average cost of capital.E. all equity cost of capital plus the weighted average cost of debt.8. The appropriate cost of debt to the firm is:A. the weighted cost of debt after tax.B. the levered equity rate.C. the market borrowing rate after tax.D. the coupon rate pre-tax.E. None of the above.9. Although the three capital budgeting methods are equivalent, they all can have difficulties making computation impossible at times. The most useful methods or tools from a practical standpoint are:A. APV because debt levels are unknown in future years.B. WACC because projects have constant risk and target debt to value ratios.C. Flow-to-equity because of constant risk and that managers think in terms of optimal debt to equity ratios.D. Both A and B.E. Both B and C.10. The APV method to value a project should be used when the:A. project's level of debt is known over the life of the project.B. project's target debt to value ratio is constant over the life of the project.C. project's debt financing is unknown over the life of the project.D. Both A and B.E. Both B and C.11. In order to value a project which is not scale enhancing you need to:A. typically calculate the equity cost of capital using the risk adjusted beta of another firm in the industry before calculating the W ACC.B. typically increase the beta of another firm in the same line of business and then calculate the discount rate using the SML.C. typically you can simply apply your current cost of capital.D. discount at the market rate of return since the project will diversify the firm to the market.E. typically calculate the equity cost of capital using the risk adjusted beta of another firm in another industry before calculating the WACC.12. Which capital budgeting tools, if properly used, will yield the same answer?A. W ACC, IRR, and APVB. NPV, IRR, and APVC. NPV, APV and Flow to DebtD. NPV, APV and WACCE. APV, W ACC, and Flow to Equity13. The flow-to-equity approach to capital budgeting is a three step process of:A. calculating the levered cash flow, the cost of equity capital for a levered firm, then adding the interest expense when the cash flows are discounted.B. calculating the unlevered cash flow, the cost of equity capital for a levered firm, and then discounting the unlevered cash flows.C. calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and then discounting the levered cash flows by the cost of equity capital.D. calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and then discounting the levered cash flows at the risk free rate.E. None of the above.14. The term (B x rb) gives the:A. cost of debt interest payments per year.B. cost of equity dividend payments per year.C. unit cost of debt.D. unit cost of equity.E. weighted average cost of capital.15. The weighted average cost of capital is determined by:A. multiplying the weighted average after tax cost of debt by the weighted average cost of equity.B. adding the weighted average before tax cost of debt to the weighted average cost of equity.C. adding the weighted average after tax cost of debt to the weighted average cost of equity.D. dividing the weighted average before tax cost of debt by the weighted average cost of equity.E. dividing the weighted average after tax cost of debt by the weighted average cost of equity.16. A key difference between the APV, WACC, and FTE approaches to valuation is:A. how the unlevered cash flows are calculated.B. how the ratio of equity to debt is determined.C. how the initial investment is treated.D. whether terminal values are included or not.E. how debt effects are considered; i.e. the target debt to value ratio and the level of debt.17. Using APV, the analysis can be tricky in examples of:A. tax subsidy to debt.B. interest subsidy.C. flotation costs.D. All of the above.E. Both A and C.18. To calculate the adjusted present value, one will:A. multiply the additional effects by the all equity project value.B. add the additional effects of financing to the all equity project value.C. divide the project's cash flow by the risk-free rate.D. divide the project's cash flow by the risk-adjusted rate.E. add the risk-free rate to the market portfolio when B equals 1.19. Flotation costs are incorporated into the APV framework by:A. adding them into the all equity value of the project.B. subtracting them from the all equity value of the project.C. incorporating them into the WACC.D. disregarding them.E. None of the above.20. Non-market or subsidized financing ________ the APV ___________.A. has no impact on; as the lower interest rate is offset by the lower discount rateB. decreases; by decreasing the NPV of the loanC. increases; by increasing the NPV of the loanD. has no impact on; as the tax deduction is not allowed with any government supported financingE. None of the above21. What are the three standard approaches to valuation under leverage?A. CAPM, SML, and CMLB. APR, FTE, and CAPMC. APT, W ACC, and CAPMD. APV, FTE, and WACCE. NPV, IRR, Payback22. The non-market rate financing impact on the APV is:A. calculated by Tc B because the tax shield depends only on the amount of financing.B. calculated by subtracting the all equity NPV from the FTE NPV.C. irrelevant because it is always less than the market financing rate.D. calculated by the NPV of the loan using both debt rates.E. None of the above.23. Which of the following are guidelines for the three methods of capital budgeting with leverage?A. Use APV if project's level of debt is known over the life of the project.B. Use APV if project's level of debt is unknown over the life of the project.C. Use FTE or WACC if the firm's target debt-to-value ratio applies to the project over its life.D. Both A and C.E. Both B and C.24. An appropriate guideline to adopt when determining the valuation formula to use is:A. never use the APV approach.B. use APV if the project is far different from scale enhancing.C. use W ACC if the project is close to being scale enhancing.D. Both A and C.E. Both B and C.25. In a leveraged buyout, the equity holders expect a successful buyout if:A. the firm generates enough cash to serve the debt in early years.B. the company can be taken public or sold in 3 to 7 years.C. the company is attractive to buyers as the buyout matures.D. All of the above.E. None of the above.26. The W ACC approach to valuation is not as useful as the APV approach in leveraged buyouts because:A. there is greater risk with a LBO.B. the capital structure is changing.C. there is no tax shield with the WACC.D. the value of the levered and unlevered firms are equal.E. the unlevered and levered cash flows are separated which cannot be used with the WACC approach.27. The value of a corporation in a levered buyout is composed of which following four parts:A. unlevered cash flows and interest tax shields during the debt paydown period, unlevered terminal value, and asset sales.B. unlevered cash flows and interest tax shields during the debt paydown period, unlevered terminal value and interest tax shields after the paydown period.C. levered cash flows and interest tax shields during the debt paydown period, levered terminal value and interest tax shields after the paydown period.D. levered cash flows and interest tax shields during the debt paydown period, unlevered terminal value and interest tax shields after the paydown period.E. asset sales, unlevered cash flows during the paydown period, interest tax shields and unlevered terminal value.28. If the WACC is used in valuing a leveraged buyout, the:A. W ACC remains constant because of the final target debt ratio desired.B. flotation costs must be added to the total UCF.C. WACC must be recalculated as the debt is repaid and the cost of capital changes.D. tax shields of debt are not available because the corporation is no longer publicly traded.E. None of the above.29. The flow-to-equity approach has been used by the firm to value their capital budgeting projects. The total investment cost at time 0 is $640,000. The company uses the flow-to-equity approach because they maintain a target debt to value ratio over project lives. The company has a debt to equity ratio of 0.5. The present value of the project including debt financing is $810,994. What is the relevant initial investment cost to use in determining the value of the project?A. $170,994B. $267,628C. $372,372D. $543,366E. $640,00030. A firm has a total value of $500,000 and debt valued at $300,000. What is the weighted average cost of capital if the after tax cost of debt is 9% and the cost of equity is 14%?A. 7.98%B. 10.875%C. 11.000%D. 12.125%E. It is impossible to determine WACC without debt and equity betas.31. The Felix Filter Corp. maintains a debt-equity ratio of .6. The cost of equity for Richardson Corp. is 16%, the cost of debt is 11% and the marginal tax rate is 30%. What is the weighted average cost of capital?A. 8.38%B. 11.02%C. 12.89%D. 13.00%E. 14.12%32. The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $100,000 forever. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%?A. $428,571B. $444,459C. $565,547D. $1,000,000E. None of the above is the correct NPV.33. The Tip-Top Paving Co. has an equity cost of capital of 16.97%. The debt to value ratio is .6, the tax rate is 34%, and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?A. 0.08%B. 3.06%C. 14.0%D. 16.97%E. None of the above.34. The Tip-Top Paving Co. wants to be levered at a debt to value ratio of .6. The cost of debt is 11%, the tax rate is 34%, and the cost of equity for an all equity firm is 14%. What will be Tip-Top's cost of equity?A. 0.08%B. 3.06%C. 14.0%D. 16.97%E. None of the above.35. The Tip-Top Paving Co. has a beta of 1.11, a cost of debt of 11% and a debt to value ratio of .6. The current risk free rate is 9% and the market rate of return is 16.18%. What is the company's cost of equity capital?A. 7.97%B. 8.96%C. 16.97%D. 17.96%E. 26.96%36. The Telescoping Tube Company is planning to raise $2,500,000 in perpetual debt at 11% to finance part of their expansion. They have just received an offer from the Albanic County Board of Commissioners to raise the financing for them at 8% if they build in Albanic County. What is the total added value of debt financing to Telescoping Tube if their tax rate is 34% and Albanic raises it for them?A. $850,000B. $1,200,000C. $1,300,000D. $1,650,000E. There is no value to the scheme; Albanic is just conning Telescoping Tube into moving.37. The BIM Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated to be $125 million. BIM wishes to finance this project using its traditional debt-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total flotation cost?A. $0.75 millionB. $1.29 millionC. $3.19 millionD. $3.75 millionE. $8.75 million38. A very large firm has a debt beta of zero. If the cost of equity is 11%, and the risk-free rate is 5%, the cost of debt is:A. 5%B. 6%C. 11%D. 15%E. It is impossible to tell without the expected market return.39. The Free-Float Company, a company in the 36% tax bracket, has riskless debt in its capital structure which makes up 40% of the total capital structure, and equity is the other 60%. The beta of the assets for this business is .8 and the equity beta is:A. 0.53B. 0.73C. 0.80D. 1.14E. 1.4740. The Delta Company has a capital structure of 20% risky debt with a β of .9 and 80% equity with a β of1.7. Their current tax rate is 34%. What is the β for Delta Company?A. 0.59B. 0.82C. 1.06D. 1.49E. 1.5441. A firm is valued at $6 million and has debt of $2 million outstanding. The firm has an equity beta of1.8 and a debt beta of .42. The beta of the overall firm is:A. 1.00B. 1.11C. 1.20D. 1.34E. It is impossible to determine with the information given.42. Brad's Boat Company, a company in the 40% tax bracket, has riskless debt in its capital structure which makes up 30% of the total capital structure, and equity is the other 70%. The beta of the assets for this business is .9 and the equity beta is:A. 0.54B. 0.90C. 1.13D. 1.20E. 1.4943. The Delta Company has a capital structure of 30% risky debt with a β of 1.1 and 70% equity with a βof 1.4. Their current tax rate is 30%. What is the β for Delta Company?A. 0.95B. 1.00C. 1.10D. 1.31E. 1.4044. A firm is valued at $8 million and has debt of $2 million outstanding. The firm has an equity beta of1.5 and a debt beta of .60. The beta of the overall firm is:A. 0.600B. 1.155C. 1.275D. 1.500E. None of the above.Essay Questions45. A loan of $10,000 is issued at 15% interest. Interest on the loan is to be repaid annually for 5 years, and the non-amortized principal is due at the end of the fifth year. Calculate the NPV of the loan if the company's tax rate is 34%.46. The Azzon Oil Company is considering a project that will cost $50 million and have a year-end after-tax cost savings of $7 million in perpetuity. Azzon's before tax cost of debt is 10% and its cost of equity is 16%. The project has risk similar to that of the operation of the firm, and the target debt-equity ratio is 1.5. What is the NPV for the project if the tax rate is 34%?47. Quick-Link has debt outstanding with a market value of $200 million, and equity outstanding with a market value of $800 million. Quick-Link is in the 34% tax bracket, and its debt is considered risk free. Merrill Lynch has provided an equity beta of 1.50. Given a risk free rate of 3% and an expected market return of 12%, calculate the discount rate for a scale enhancing project in the hypothetical case that Quick-Link is all equity financed.48. A project has a NPV, assuming all equity financing, of $1.5 million. To finance the project, debt is issued with associated flotation costs of $60,000. The flotation costs can be amortized over the project's 5 year life. The debt of $10 million is issued at 10% interest, with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is 34%, calculate the project's APV.49. The all equity cost of capital for flat Rock Grinding is 15% and the company has set a target debt to value ratio of 50%. The current cost of debt for a firm of this risk is 10% and the corporate tax rate is 34%. Calculate the WACC for the Flat Rock Grinding Corporation.50. Kelly Industries is given the opportunity to raise $5 million in debt through a local government subsidized program. While Kelly would be required to pay 12% on its debt issues, the Hampton County program sets the rate at 9%. If the debt issue expires in 4 years, calculate the NPV of this financing decision.51. Discuss the adjusted present value, the flow to equity and the weighted average cost of capital methods of capital budgeting with leverage and the guidelines for using each method.Chapter 18 Valuation and Capital Budgeting for the Levered Firm Answer KeyMultiple Choice Questions1. The flow-to-equity (FTE) approach in capital budgeting is defined to be the:A. discounting all cash flows from a project at the overall cost of capital.B. scale enhancing discount process.C. discounting of the levered cash flows to the equity holders for a project at the required return on equity.D. dividends and capital gains that may flow to a shareholders of any firm.E. discounting of the unlevered cash flows of a project from a levered firm at the WACC.Difficulty level: ChallengeTopic: FLOW-TO-EQUITY APPROACHType: DEFINITIONS2. The acronym APV stands for:A. applied present value.B. all purpose variable.C. accepted project verified.D. adjusted present value.E. applied projected value.Difficulty level: EasyTopic: APVType: DEFINITIONS3. A leveraged buyout (LBO) is when a firm is acquired by:A. a small group of management with equity financing.B. a small group of equity investors financing the majority of the price by debt.C. any group of equity investors when the majority is financed with preferred stock.D. any group of investors for the assets of the corporation.E. None of the above.Difficulty level: EasyTopic: LEVERAGED BUYOUTType: DEFINITIONS4. Discounting the unlevered after tax cash flows by the _____ minus the ______ yields the ________.A. cost of capital for the unlevered firm; initial investment; adjusted present value.B. cost of equity capital; initial investment; project NPV.C. weighted cost of capital; fractional equity investment; project NPV.D. cost of capital for the unlevered firm; initial investment; all-equity net present value.E. None of the above.Difficulty level: MediumTopic: ALL EQUITY NET PRESENT VALUEType: CONCEPTS5. The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This may result in:A. firms rejecting positive NPV, all equity projects because changing to a capital structure with debt will always create negative NPV.B. never considering capital budgeting projects on their own merits.C. corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing the project.D. firms accepting some negative NPV all equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV.E. firms never changing the capital structure because all capital budgeting decisions will be subsumed by capital structure decisions.Difficulty level: EasyTopic: CAPITAL BUDGETING AND CAPITAL STRUCTUREType: CONCEPTS6. The APV method is comprised of the all equity NPV of a project and the NPV of financing effects. The four side effects are:A. tax subsidy of dividends, cost of issuing new securities, subsidy of financial distress and cost of debt financing.B. cost of issuing new securities, cost of financial distress, tax subsidy of debt and other subsidies to debt financing.C. cost of issuing new securities, cost of financial distress, tax subsidy of dividends and cost of debt financing.D. subsidy of financial distress, tax subsidy of debt, cost of other debt financing and cost of issuing new securities.E. None of the above.Difficulty level: MediumTopic: SIDE EFFECTS OF APVType: CONCEPTS7. In calculating the NPV using the flow-to-equity approach the discount rate is the:A. all equity cost of capital.B. cost of equity for the levered firm.C. all equity cost of capital minus the weighted average cost of debt.D. weighted average cost of capital.E. all equity cost of capital plus the weighted average cost of debt.Difficulty level: MediumTopic: FLOW-TO-EQUITY APPROACHType: CONCEPTS8. The appropriate cost of debt to the firm is:A. the weighted cost of debt after tax.B. the levered equity rate.C. the market borrowing rate after tax.D. the coupon rate pre-tax.E. None of the above.Difficulty level: EasyTopic: COST OF DEBTType: CONCEPTS9. Although the three capital budgeting methods are equivalent, they all can have difficulties making computation impossible at times. The most useful methods or tools from a practical standpoint are:A. APV because debt levels are unknown in future years.B. WACC because projects have constant risk and target debt to value ratios.C. Flow-to-equity because of constant risk and that managers think in terms of optimal debt to equity ratios.D. Both A and B.E. Both B and C.Difficulty level: ChallengeTopic: CAPITAL BUDGETING METHODSType: CONCEPTS10. The APV method to value a project should be used when the:A. project's level of debt is known over the life of the project.B. project's target debt to value ratio is constant over the life of the project.C. project's debt financing is unknown over the life of the project.D. Both A and B.E. Both B and C.Difficulty level: ChallengeTopic: APVType: CONCEPTS11. In order to value a project which is not scale enhancing you need to:A. typically calculate the equity cost of capital using the risk adjusted beta of another firm in the industry before calculating the W ACC.B. typically increase the beta of another firm in the same line of business and then calculate the discount rate using the SML.C. typically you can simply apply your current cost of capital.D. discount at the market rate of return since the project will diversify the firm to the market.E. typically calculate the equity cost of capital using the risk adjusted beta of another firm in another industry before calculating the WACC.Difficulty level: ChallengeTopic: PROJECT VALUATIONType: CONCEPTS12. Which capital budgeting tools, if properly used, will yield the same answer?A. W ACC, IRR, and APVB. NPV, IRR, and APVC. NPV, APV and Flow to DebtD. NPV, APV and WACCE. APV, W ACC, and Flow to EquityDifficulty level: MediumTopic: CAPITAL BUDGETING TOOLSType: CONCEPTS13. The flow-to-equity approach to capital budgeting is a three step process of:A. calculating the levered cash flow, the cost of equity capital for a levered firm, then adding the interest expense when the cash flows are discounted.B. calculating the unlevered cash flow, the cost of equity capital for a levered firm, and then discounting the unlevered cash flows.C. calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and then discounting the levered cash flows by the cost of equity capital.D. calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and then discounting the levered cash flows at the risk free rate.E. None of the above.Difficulty level: MediumTopic: FLOW-TO-EQUITY APPROACHType: CONCEPTS14. The term (B x rb) gives the:A. cost of debt interest payments per year.B. cost of equity dividend payments per year.C. unit cost of debt.D. unit cost of equity.E. weighted average cost of capital.Difficulty level: EasyTopic: COST OF DEBTType: CONCEPTS15. The weighted average cost of capital is determined by:A. multiplying the weighted average after tax cost of debt by the weighted average cost of equity.B. adding the weighted average before tax cost of debt to the weighted average cost of equity.C. adding the weighted average after tax cost of debt to the weighted average cost of equity.D. dividing the weighted average before tax cost of debt by the weighted average cost of equity.E. dividing the weighted average after tax cost of debt by the weighted average cost of equity.Difficulty level: EasyTopic: WACCType: CONCEPTS16. A key difference between the APV, WACC, and FTE approaches to valuation is:A. how the unlevered cash flows are calculated.B. how the ratio of equity to debt is determined.C. how the initial investment is treated.D. whether terminal values are included or not.E. how debt effects are considered; i.e. the target debt to value ratio and the level of debt.Difficulty level: MediumTopic: DEBT EFFECTS AND CAPITAL BUDGETINGType: CONCEPTS17. Using APV, the analysis can be tricky in examples of:A. tax subsidy to debt.B. interest subsidy.C. flotation costs.D. All of the above.E. Both A and C.Difficulty level: MediumTopic: APVType: CONCEPTS。
罗斯公司理财题库全集
罗斯公司理财题库全集公司内部编号：（GOOD-TMMT-MMUT-UUPTY-UUYY-DTTI-Chapter 24Warrants and Convertibles Multiple Choice Questions1.A warrant gives the owner:？A.the obligation to sell securities directly to the firm at a fixed price for a specified time.B.the right to purchase securities directly from the firm at a fixed price for a specified time.C.the obligation to purchase securities directly from the firm at a fixed price for a specified time.D.the right to sell securities directly to the firm at a fixed price for a specified time.E.None of the above.2.Warrants are most often issued in combination with:？A.new publicly placed common stock.B.new privately placed common stock.C.new publicly placed debt.D.new privately placed debt.E.preferred stock.3.An "equity kicker" most often refers to a:？A.bond with conversion privileges.B.preferred stock offering with conversion privileges.C.warrant.D.lettered common stock.E.None of the above.4.Warrants are similar to traded options except:？A.only warrants have exercise prices.B.only warrants depend on changes in the underlying stock to determine value.C.warrants affect the number of shares outstanding.D.Both A and C.E.Both A and B.5.BrightView Windows issued warrants with an exercise price of $17. BrightView's common stock currently sells for $20 per share. The warrants are:？A.in the money.B.out of the money.C.valuable.D.not very valuable.E.Both A and C.6.Warrants are similar to options, in that the value of the warrant is limited by:？A.expiring worthless if the stock price is below the total warrant exercise price.B.the trading capabilities of the exchange used.C.the price of the underlying stock divided by the number of warrants needed to purchase a share.D.Both A and C.E.Both B and C.7.Which of the following would not describe the difference between warrants and call options？A.Warrants are issued by firms whereas call options are issued by individuals.B.Call options have an exercise price whereas warrants do not.C.Exercising of warrants creates dilution whereas exercising call options does not.D.When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued.E.None of the above.8.Two major differences between a warrant and a call option are:？A.warrants are contracts outside of the firm while options are within the firm.B.warrants have long maturities while options are usually short maturities.C.warrant exercise dilutes the value of equity while option exercise does not.D.Both A and C.E.Both B and C.9.Concerning warrants and call options, which of the following statements generally is correct？A.The issue procedures for both are quite similar.B.When a call option is exercised, the firm must issue new stock.C.When a warrant is exercised, existing stock changes hands.D.Exercise of a call option does not affect share value, but warrant exercise does.E.None of the above is correct.10.Which of the following would harm the position of a warrant holder？A.a 3 for 1 stock splitB.a large stock dividend of 20%C.a large cash dividendD.listing of the warrants on the NYSEE.None of the above would harm the warrant holders.11.The gain from exercising a warrant is similar to the gain from exercising a call option except:？A.the gain on a warrant is greater by the fraction of warrant shares divided by total shares.B.the gain on a warrant is limited by the firm's value after being reduced by the debt of the firm.C.the gain on a warrant is decreased by the fraction of original shares divided by total post exercise shares.D.Both A and B.E.Both B and C.12.The exercise of warrants creates new shares which:？A.increases the total number of shares but does not affect share value.B.increases the total number of shares which can reduce an individual share value.C.does not change the number of shares outstanding, similar to options.D.increases share value because cash is paid into the firm at the time of warrant exercise.E.None of the above.13.If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:？A.callable.B.convertible.C.protected.D.putable.E.None of the above.14.A convertible preferred stock is similar to a convertible bond except:？A.the conversion ratio is fixed (given).B.the conversion price is fixed (given).C.the time to maturity is infinite.D.All of the above.E.None of the above.15.The holder of a $1,000 face value bond has the right to exchange the bond anytime before maturity for shares of stock priced at $50 per share. The $50 is called the:？A.conversion price.B.stated price.C.exercise price.D.striking price.E.None of the above.16.Concerning convertible bonds, which of the following statements is not correct？A.The value of a convertible bond will generally be greater than its straight bond value.B.The value of a convertible bond will generally be greater than its conversion value.C.The difference between the conversion value and the straight bond value is the conversion or option premium.D.The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond.E.All of the above are correct.17.Concerning convertible bonds, which of the following statements is not correct？A.A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.B.Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.C.If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value.D.Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.E.More than one of the above is incorrect.18.Concerning convertible bonds, which of the following statements is not correct？A.With regard to security, most convertible bonds are secured by common stock ., they are collateral trust bonds).B.For most convertible bonds, the issuing firm can, under certain circumstances, effectively force bondholders to convert to common stock.C.When a convertible bond is called, the owner has the option of receiving cash or stock for the bond.D.All of the above are incorrect.E.All of the above are correct.19.A convertible bond has an option value which is equal to:？A.the market value of the convertible bond minus the straight bond value.B.The market value of the convertible bond minus the conversion value.C.the market value of the convertible bond minus the conversion premium.D.the market value of the convertible bond minus the maximum of the straight bond value or conversion value.E.None of the above.20.A firm has experienced a significant increase in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？mon stockB.Bond/warrant packageC.Convertible preferred stockD.Straight bondsE.Convertible bonds21.A firm has experienced a significant decrease in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？A.Convertible bondsB.Convertible preferred stockC.Straight debtD.Indifferent between A and B.E.Indifferent between A, B, and C.22.Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:？A.the effects of risk are opposite on the two value components and tend to cancel each other out.B.if the firm is high risk, the option premium will be higher while the straight bond value is fixed.C.only risky companies issue these instruments.D.the equity value is dependent on current risks only, not the future risk at conversion.E.None of the above.23.Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:？A.subordinated straight debt is issued because there are other senior bondholders to protect them.B.convertible debt is issued because the equity component will reduce these agency costs when value is shared.C.convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken.D.subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued.E.None of the above.24.From the shareholder's point of view, the optimum time to call a convertible bond is when the bond's conversion value is:？A.less than the call price, but greater than the face value.B.greater than the call price, but less than straight debt's value.C.equal to the face value.D.less than straight debt's value, but greater than the call price.E.None of the above.25.Based on empirical studies, firms tend to call convertible bonds when the conversion value is:？A.less than the conversion price.B.greater than the straight bond value.C.greater than the call price.D.less than the face value.E.None of the above.26.Which of the following would not be a sensible explanation of why convertibles and warrants are issued if markets are efficient？A.Cash flow from these securities best match cash flow of the firm.B.If the firm does well, convertible bonds will turn out to have been the better alternative versus issuing common stock.C.The securities are useful when it is costly to assess the risk of the issuing firm.D.The securities may resolve agency problems associated with raising money.E.All of the above are sensible explanations.27.BrightView Windows issued warrants with an exercise price of $17for one share per warrant. On May 1, BrightView's common stock is at $20 per share. The lower and upper limits on the warrant value on May 1 are:？A.$0 and $3B.$0 and $17C.$3 and $17D.$3 and $20E.$17 and $20Diamond Drill Inc. has 150,000 shares and 15,000 warrants outstanding.A warrant holder can purchase a new share of stock for five warrants and $ per warrant. The stock is currently selling for $27 per share.28.The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion ratio is:？A.25.B.40.C.100.D.Depends on the current market price of the bond.E.None of the above.29.The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion price is:？A.$25.B.$40.C.$100.D.Depends on the current market price of the bond.E.None of the above.30.If all warrants are exercised, what will your fraction of ownership be if you owned 20,000 shares originally？A.%B.%C.%D.%E.Without knowing the exercise price the percent can not be determined.31.If the warrants are all exercised immediately, what would be the market price of the stock？A.$B.$C.$D.$E.$32.What would your gain per share be from exercising the warrants, assuming all are exercised？A.$ per shareB.$ per shareC.$ per shareD.$ per shareE.$ per share33.A firm has 100 shares of stock and 40 warrants outstanding. The warrants are about to expire, and all of them will be exercised. The market value of the firm's assets is $2,000, and the firm has no debt. Each warrant gives the owner the right to buy 2 shares at $15 per share. What is the price per share of the stock？A.$B.$C.$D.$E.None of the above.The holders of Xenron Corporation's bond with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $.34.What is the conversion price？A.$B.$C.$D.$1,E.No conversion premium is given.35.What is the conversion premium？A.%B.%C.%D.%E.None of the above.36.What would the conversion price and conversion ratio be if Xenron had a 3 for 1 stock split？A.$; 75B.$; 105C.$; 25D.$; 35E.None of the above.37.What is the conversion value of the bond？A.$25B.$40C.$770D.$1,000E.No conversion premium is given.The holders of Mikayla Corporation's bond with a face value of $1,000 can exchange that bond for 30 shares of stock. The stock is selling for $.38.What is the conversion price？A.$B.$C.$D.$1,E.No conversion premium is given.39.What is the conversion premium？A.%B.%C.%D.%E.None of the above.40.What would the conversion price and conversion ratio be if Mikayla had a 4 for 1 stock split？A.$; 75B.$; 120C.$; 125D.$; 135E.None of the above.41.What is the conversion value of the bond？A.$25B.$40C.$750D.$1,000E.No conversion premium is given.42.A convertible bond has an 8% annual coupon and 15 years to maturity. The face value is $1,000 and the conversion ratio is 40. The stock currently sells for $ per share. Similar nonconvertible bonds arepriced to yield 9%. The value of the convertible bond is at least:？A.$.B.$.C.$1,.D.$1,.E.None of the above.43.A convertible bond is selling for $800. It has 10 years to maturity,a $1,000 face value, and a 10% coupon. Similar nonconvertible bondsare priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $ per share. The conversion premium is:？A.%.B.%.C.%.D.%.E.None of the above.Essay Questions44.A firm has 500 shares of stock and 100 warrants outstanding. The warrants are about to expire, and all of them will be exercised. The market value of the firm's assets is $25,000, and the market value of the debt is $8,000. Each warrant gives the owner the right to buy 5 shares at $25 per share. What is the value of a warrant45.A firm has 2,000 shares of stock and 200 warrants outstanding. The warrants are about to expire, and all of them will be exercised. The market value of the firm's assets is $14,000, and the firm has no debt. Each warrant gives the owner the right to buy 1 share at $5. What isthe warrant's effective exercise price46.Kida Consultants has 100,000 shares of stock outstanding. Thefirm's value net of debt is $2 million. Kida has 1,000 warrants outstanding with an exercise price of $18, where each warrant entitles the holder to purchase one share of stock. Calculate the gain from exercising a single warrant.47.Kida Consultants currently has 300,000 shares of common outstanding. Firm value net of debt is $3,900,000. Kida has warrants outstandingwith an exercise price of $10. How many warrants must the firm have issued if the gain from exercising a single warrant is $a $1,000 face value, and an 8% coupon paid semi-annually. Similar non-convertible bonds are priced to yield %. The conversion ratio is 20. The stock currently sells for $ per share. Calculate the convertible bond's option value.49.A convertible bond is selling for $1,. It has 10 years to maturity,a $1,000 face value, and a 10% coupon paid semi-annually. Similar non-convertible bonds are priced to yield 8%. The conversion ratio is 40. The stock currently sells for $ per share. Calculate the convertible bond's option value.50.A bond/warrant package is priced to sell at a face value of $1,000. Each bond comes with 50 detachable warrants. A warrant gives the owner the right to buy 1 share of stock at $20 per share. The value of a warrant has been estimated at $2. The bonds mature in 20 years.Similar bonds without warrants yield 10%. What is the bond's annual coupona $1000 face value, and a 10% coupon paid semi-annually. Similar nonconvertible bonds are priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $ per share. Determine the bond's option premium.52.Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued53.Illustrate and explain how a convertible bond value is based on both debt and equity value. What is the option value54.Why are warrants and convertibles issuedChapter 24 Warrants and Convertibles Answer KeyMultiple Choice Questions1.A warrant gives the owner:？A.the obligation to sell securities directly to the firm at a fixed price for a specified time.B.the right to purchase securities directly from the firm at a fixed price for a specified time.C.the obligation to purchase securities directly from the firm at a fixed price for a specified time.D.the right to sell securities directly to the firm at a fixed price for a specified time.E.None of the above.Difficulty level: EasyTopic: WARRANTType: DEFINITIONS2.Warrants are most often issued in combination with:？A.new publicly placed common stock.B.new privately placed common stock.C.new publicly placed debt.D.new privately placed debt.E.preferred stock.Difficulty level: Easy Topic: WARRANTType: DEFINITIONS3.An "equity kicker" most often refers to a:？A.bond with conversion privileges.B.preferred stock offering with conversion privileges.C.warrant.D.lettered common stock.E.None of the above.Difficulty level: EasyTopic: WARRANTType: DEFINITIONS4.Warrants are similar to traded options except:？A.only warrants have exercise prices.B.only warrants depend on changes in the underlying stock to determine value.C.warrants affect the number of shares outstanding.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: WARRANTType: DEFINITIONS5.BrightView Windows issued warrants with an exercise price of $17. BrightView's common stock currently sells for $20 per share. The warrants are:？A.in the money.B.out of the money.C.valuable.D.not very valuable.E.Both A and C.Difficulty level: MediumTopic: VALUE OF WARRANTSType: DEFINITIONS6.Warrants are similar to options, in that the value of the warrant is limited by:？A.expiring worthless if the stock price is below the total warrant exercise price.B.the trading capabilities of the exchange used.C.the price of the underlying stock divided by the number of warrants needed to purchase a share.D.Both A and C.E.Both B and C.Difficulty level: MediumTopic: VALUE OF WARRANTType: CONCEPTS7.Which of the following would not describe the difference between warrants and call options？A.Warrants are issued by firms whereas call options are issued by individuals.B.Call options have an exercise price whereas warrants do not.C.Exercising of warrants creates dilution whereas exercising call options does not.D.When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued.E.None of the above.Difficulty level: EasyTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS8.Two major differences between a warrant and a call option are:？A.warrants are contracts outside of the firm while options are within the firm.B.warrants have long maturities while options are usually short maturities.C.warrant exercise dilutes the value of equity while option exercise does not.D.Both A and C.E.Both B and C.Difficulty level: MediumTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS9.Concerning warrants and call options, which of the following statements generally is correct？A.The issue procedures for both are quite similar.B.When a call option is exercised, the firm must issue new stock.C.When a warrant is exercised, existing stock changes hands.D.Exercise of a call option does not affect share value, but warrant exercise does.E.None of the above is correct.Difficulty level: MediumTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS10.Which of the following would harm the position of a warrant holder？A.a 3 for 1 stock splitB.a large stock dividend of 20%C.a large cash dividendD.listing of the warrants on the NYSEE.None of the above would harm the warrant holders.Difficulty level: ChallengeTopic: WARRANTS AND DIVIDENDSType: CONCEPTS11.The gain from exercising a warrant is similar to the gain from exercising a call option except:？A.the gain on a warrant is greater by the fraction of warrant shares divided by total shares.B.the gain on a warrant is limited by the firm's value after being reduced by the debt of the firm.C.the gain on a warrant is decreased by the fraction of original shares divided by total post exercise shares.D.Both A and B.E.Both B and C.Difficulty level: ChallengeTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS12.The exercise of warrants creates new shares which:？A.increases the total number of shares but does not affect share value.B.increases the total number of shares which can reduce an individual share value.C.does not change the number of shares outstanding, similar to options.D.increases share value because cash is paid into the firm at the time of warrant exercise.E.None of the above.Difficulty level: EasyTopic: EXERCISE OF WARRANTSType: CONCEPTS13.If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:？A.callable.B.convertible.C.protected.D.putable.E.None of the above.Difficulty level: EasyTopic: CONVERTIBLESType: CONCEPTS14.A convertible preferred stock is similar to a convertible bond except:？A.the conversion ratio is fixed (given).B.the conversion price is fixed (given).C.the time to maturity is infinite.D.All of the above.E.None of the above.Difficulty level: EasyTopic: CONVERTIBLESType: CONCEPTS15.The holder of a $1,000 face value bond has the right to exchange the bond anytime before maturity for shares of stock priced at $50 per share. The $50 is called the:？A.conversion price.B.stated price.C.exercise price.D.striking price.E.None of the above.Difficulty level: EasyTopic: CONVERSION PRICEType: CONCEPTS16.Concerning convertible bonds, which of the following statements is not correct？A.The value of a convertible bond will generally be greater than its straight bond value.B.The value of a convertible bond will generally be greater than its conversion value.C.The difference between the conversion value and the straight bond value is the conversion or option premium.D.The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond.E.All of the above are correct.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS17.Concerning convertible bonds, which of the following statements is not correct？A.A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.B.Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.C.If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value.D.Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.E.More than one of the above is incorrect.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS18.Concerning convertible bonds, which of the following statements is not correct？A.With regard to security, most convertible bonds are secured by common stock ., they are collateral trust bonds).B.For most convertible bonds, the issuing firm can, under certain circumstances, effectively force bondholders to convert to common stock.C.When a convertible bond is called, the owner has the option of receiving cash or stock for the bond.D.All of the above are incorrect.E.All of the above are correct.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS19.A convertible bond has an option value which is equal to:？A.the market value of the convertible bond minus the straight bond value.B.The market value of the convertible bond minus the conversion value.C.the market value of the convertible bond minus the conversion premium.D.the market value of the convertible bond minus the maximum of the straight bond value or conversion value.E.None of the above.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS20.A firm has experienced a significant increase in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？mon stockB.Bond/warrant packageC.Convertible preferred stockD.Straight bondsE.Convertible bondsDifficulty level: MediumTopic: STRAIGHT BONDS AND SHARE VALUEType: CONCEPTS21.A firm has experienced a significant decrease in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？A.Convertible bondsB.Convertible preferred stockC.Straight debtD.Indifferent between A and B.E.Indifferent between A, B, and C.Difficulty level: MediumTopic: CONVERTIBLE BONDS AND SHARE VALUEType: CONCEPTS22.Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:？A.the effects of risk are opposite on the two value components and tend to cancel each other out.B.if the firm is high risk, the option premium will be higher while the straight bond value is fixed.C.only risky companies issue these instruments.D.the equity value is dependent on current risks only, not the future risk at conversion.E.None of the above.Difficulty level: ChallengeTopic: CONVERTIBLES AND RISKType: CONCEPTS23.Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:？A.subordinated straight debt is issued because there are other senior bondholders to protect them.B.convertible debt is issued because the equity component will reduce these agency costs when value is shared.C.convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken.D.subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued.E.None of the above.Difficulty level: ChallengeTopic: CONVERTIBLE DEBTType: CONCEPTS24.From the shareholder's point of view, the optimum time to call a convertible bond is when the bond's conversion value is:？A.less than the call price, but greater than the face value.B.greater than the call price, but less than straight debt's value.C.equal to the face value.D.less than straight debt's value, but greater than the call price.E.None of the above.Difficulty level: MediumTopic: TIMING OF CONVERSIONType: CONCEPTS25.Based on empirical studies, firms tend to call convertible bonds when the conversion value is:？A.less than the conversion price.B.greater than the straight bond value.C.greater than the call price.D.less than the face value.E.None of the above.Difficulty level: MediumTopic: EMPIRICAL RESEARCH - CALLING CONVERTIBLESType: CONCEPTS。
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Chapter 16Capital Structure: Basic Concepts Multiple Choice Questions1. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:A. homemade leverage.B. dividend recapture.C. the weighted average cost of capital.D. private debt placement.E. personal offset.2. The proposition that the value of the firm is independent of its capital structure is called:A. the capital asset pricing model.B. MM Proposition I.C. MM Proposition II.D. the law of one price.E. the efficient markets hypothesis.3. The proposition that the cost of equity is a positive linear function of capital structure is called:A. the capital asset pricing model.B. MM Proposition I.C. MM Proposition II.D. the law of one price.E. the efficient markets hypothesis.4. The tax savings of the firm derived from the deductibility of interest expense is called the:A. interest tax shield.B. depreciable basis.C. financing umbrella.D. current yield.E. tax-loss carry forward savings.5. The unlevered cost of capital is:A. the cost of capital for a firm with no equity in its capital structure.B. the cost of capital for a firm with no debt in its capital structure.C. the interest tax shield times pretax net income.D. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure.E. equal to the profit margin for a firm with some debt in its capital structure.6. The cost of capital for a firm, rWACC, in a zero tax environment is:A. equal to the expected earnings divided by market value of the unlevered firm.B. equal to the rate of return for that business risk class.C. equal to the overall rate of return required on the levered firm.D. is constant regardless of the amount of leverage.E. All of the above.7. The difference between a market value balance sheet and a book value balance sheet is that a market value balance sheet:A. places assets on the right hand side.B. places liabilities on the left hand side.C. does not equate the right hand with the left hand side.D. lists items in terms of market values, not historical costs.E. uses the market rate of return.8. The firm's capital structure refers to:A. the way a firm invests its assets.B. the amount of capital in the firm.C. the amount of dividends a firm pays.D. the mix of debt and equity used to finance the firm's assets.E. how much cash the firm holds.9. A general rule for managers to follow is to set the firm's capital structure such that:A. the firm's value is minimized.B. the firm's value is maximized.C. the firm's bondholders are made well off.D. the firms suppliers of raw materials are satisfied.E. the firms dividend payout is maximized.10. A levered firm is a company that has:A. Accounts Payable as the only liability on the balance sheet.B. some debt in the capital structure.C. all equity in the capital structure.D. All of the above.E. None of the above.11. A manager should attempt to maximize the value of the firm by:A. changing the capital structure if and only if the value of the firm increases.B. changing the capital structure if and only if the value of the firm increases to the benefit of inside management.C. changing the capital structure if and only if the value of the firm increases only to the benefits of the debtholders.D. changing the capital structure if and only if the value of the firm increases although it decreases the stockholders' value.E. changing the capital structure if and only if the value of the firm increases and stockholder wealth is constant.12. The effect of financial leverage depends on the operating earnings of the company. Which of the following is not true?A. Below the indifference or break-even point in EBIT the non-levered structure is superior.B. Financial leverage increases the slope of the EPS line.C. Above the indifference or break-even point the increase in EPS for all equity structures is less than debt-equity structures.D. Above the indifference or break-even point the increase in EPS for all equity structures is greater than debt-equity structures.E. The rate of return on operating assets is unaffected by leverage.13. The Modigliani-Miller Proposition I without taxes states:A. a firm cannot change the total value of its outstanding securities by changing its capital structure proportions.B. when new projects are added to the firm the firm value is the sum of the old value plus the new.C. managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value.D. the determination of value must consider the timing and risk of the cash flows.E. None of the above.14. MM Proposition I without taxes is used to illustrate:A. the value of an unlevered firm equals that of a levered firm.B. that one capital structure is as good as another.C. leverage does not affect the value of the firm.D. capital structure changes have no effect on stockholders' welfare.E. All of the above.15. A key assumption of MM's Proposition I without taxes is:A. that financial leverage increases risk.B. that individuals can borrow on their own account at rates less than the firm.C. that individuals must be able to borrow on their own account at rates equal to the firm.D. managers are acting to maximize the value of the firm.E. All of the above.16. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because:A. more shares are outstanding for the same level of EBI.B. the break-even point is higher with debt.C. a fixed interest charge must be paid even at low earnings.D. the amount of interest per share has only a positive effect on the intercept.E. the higher the interest rate the greater the slope.17. In an EPS-EBI graphical relationship, the debt ray and equity ray cross. At this point the equity and debt are:A. equivalent with respect to EPS but above and below this point equity is always superior.B. at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.C. equal but away from breakeven equity is better as fewer shares are outstanding.D. at breakeven and MM Proposition II states that debt is the better choice.E. at breakeven and debt is the better choice below breakeven because small payments can be made.18. When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of EBIT because:A. interest payments on the debt vary with EBIT levels.B. interest payments on the debt stay fixed, leaving less income to be distributed over less shares.C. interest payments on the debt stay fixed, leaving more income to be distributed over less shares.D. interest payments on the debt stay fixed, leaving less income to be distributed over more shares.E. interest payments on the debt stay fixed, leaving more income to be distributed over more shares.19. Financial leverage impacts the performance of the firm by:A. maintaining the same level of volatility of the firm's EBIT.B. decreasing the volatility of the firm's EBIT.C. decreasing the volatility of the firm's net income.D. increasing the volatility of the firm's net income.E. None of the above.20. The increase in risk to equityholders when financial leverage is introduced is evidenced by:A. higher EPS as EBIT increases.B. a higher variability of EPS with debt than all equity.C. increased use of homemade leverage.D. equivalence value between levered and unlevered firms in the presence of taxes.E. None of the above.21. The reason that MM Proposition I does not hold in the presence of corporate taxation is because:A. levered firms pay less taxes compared with identical unlevered firms.B. bondholders require higher rates of return compared with stockholders.C. earnings per share are no longer relevant with taxes.D. dividends are no longer relevant with taxes.E. All of the above.22. MM Proposition I with corporate taxes states that:A. capital structure can affect firm value.B. by raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value.C. firm value is maximized at an all debt capital structure.D. All of the above.E. None of the above.23. The change in firm value in the presence of corporate taxes only is:A. positive as equityholders face a lower effective tax rate.B. positive as equityholders gain the tax shield on the debt interest.C. negative because of the increased risk of default and fewer shares outstanding.D. negative because of a reduction of equity outstanding.E. None of the above.24. A firm should select the capital structure which:A. produces the highest cost of capital.B. maximizes the value of the firm.C. minimizes taxes.D. is fully unlevered.E. has no debt.25. In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm is known as:A. MM Proposition III that the cost of stock is less than the cost of debt.B. MM Proposition I that leverage is invariant to market value.C. MM Proposition II that the cost of equity is always constant.D. MM Proposition I that the market value of the firm is invariant to the capital structure.E. MM Proposition III that there is no risk associated with leverage in a no tax world.26. Bryan invested in Bryco, Inc. stock when the firm was financed solely with equity. The firm is now utilizing debt in its capital structure. To unlever his position, Bryan needs to:A. borrow some money and purchase additional shares of Bryco stock.B. maintain his current position as the debt of the firm did not affect his personal leverage position.C. sell some shares of Bryco stock and hold the proceeds in cash.D. sell some shares of Bryco stock and loan it out such that he creates a personal debt-equity ratio equal to that of the firm.E. create a personal debt-equity ratio that is equal to exactly 50% of the debt-equity ratio of the firm.27. The capital structure chosen by a firm doesn't really matter because of:A. taxes.B. the interest tax shield.C. the relationship between dividends and earnings per share.D. the effects of leverage on the cost of equity.E. homemade leverage.28. MM Proposition I with no tax supports the argument that:A. business risk determines the return on assets.B. the cost of equity rises as leverage rises.C. it is completely irrelevant how a firm arranges its finances.D. a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.E. financial risk is determined by the debt-equity ratio.29. The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as:A. MM Proposition I with no tax.B. MM Proposition II with no tax.C. MM Proposition I with tax.D. MM Proposition II with tax.E. static theory proposition.30. The concept of homemade leverage is most associated with:A. MM Proposition I with no tax.B. MM Proposition II with no tax.C. MM Proposition I with tax.D. MM Proposition II with tax.E. static theory proposition.31. Which of the following statements are correct in relation to MM Proposition II with no taxes?I. The required return on assets is equal to the weighted average cost of capital.II. Financial risk is determined by the debt-equity ratio.III. Financial risk determines the return on assets.IV. The cost of equity declines when the amount of leverage used by a firm rises.A. I and III onlyB. II and IV onlyC. I and II onlyD. III and IV onlyE. I and IV only32. MM Proposition I with taxes supports the theory that:A. there is a positive linear relationship between the amount of debt in a levered firm and its value.B. the value of a firm is inversely related to the amount of leverage used by the firm.C. the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.D. a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.E. a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.33. MM Proposition I with taxes is based on the concept that:A. the optimal capital structure is the one that is totally financed with equity.B. the capital structure of the firm does not matter because investors can use homemade leverage.C. the firm is better off with debt based on the weighted average cost of capital.D. the value of the firm increases as total debt increases because of the interest tax shield.E. the cost of equity increases as the debt-equity ratio of a firm increases.34. MM Proposition II with taxes:A. has the same general implications as MM Proposition II without taxes.B. reveals how the interest tax shield relates to the value of a firm.C. supports the argument that business risk is determined by the capital structure employed by a firm.D. supports the argument that the cost of equity decreases as the debt-equity ratio increases.E. reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.35. MM Proposition II is the proposition that:A. supports the argument that the capital structure of a firm is irrelevant to the value of the firm.B. the cost of equity depends on the return on debt, the debt-equity ratio and the tax rate.C. a firm's cost of equity capital is a positive linear function of the firm's capital structure.D. the cost of equity is equivalent to the required return on the total assets of a firm.E. supports the argument that the size of the pie does not depend on how the pie is sliced.36. The interest tax shield has no value for a firm when:I. the tax rate is equal to zero.II. the debt-equity ratio is exactly equal to 1.III. the firm is unlevered.IV. a firm elects 100% equity as its capital structure.A. I and III onlyB. II and IV onlyC. I, III, and IV onlyD. II, III, and IV onlyE. I, II, and IV only37. The interest tax shield is a key reason why:A. the required rate of return on assets rises when debt is added to the capital structure.B. the value of an unlevered firm is equal to the value of a levered firm.C. the net cost of debt to a firm is generally less than the cost of equity.D. the cost of debt is equal to the cost of equity for a levered firm.E. firms prefer equity financing over debt financing.38. Which of the following will tend to diminish the benefit of the interest tax shield given a progressive tax rate structure?I. a reduction in tax ratesII. a large tax loss carryforwardIII. a large depreciation tax deductionIV. a sizeable increase in taxable incomeA. I and II onlyB. I and III onlyC. II and III onlyD. I, II, and III onlyE. I, II, III, and IV39. Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?A. $20.0 millionB. $20.8 millionC. $21.0 millionD. $21.2 millionE. $21.3 million40. Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding. The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares. What is the total value of this firm if you ignore taxes?A. $15.5 millionB. $15.6 millionC. $16.0 millionD. $16.8 millionE. $17.2 million41. You own 25% of Unique Vacations, Inc. You have decided to retire and want to sell your shares in this closely held, all equity firm. The other shareholders have agreed to have the firm borrow $1.5 million to purchase your 1,000 shares of stock. What is the total value of this firm today if you ignore taxes?A. $4.8 millionB. $5.1 millionC. $5.4 millionD. $5.7 millionE. $6.0 million42. Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes?A. 11.25%B. 12.21%C. 16.67%D. 19.88%E. 21.38%43. Bigelow, Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The required return on the assets is 11%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?A. .60B. .64C. .72D. .75E. .8044. The Backwoods Lumber Co. has a debt-equity ratio of .80. The firm's required return on assets is 12% and its cost of equity is 15.68%. What is the pre-tax cost of debt based on MM Proposition II with no taxes?A. 6.76%B. 7.00%C. 7.25%D. 7.40%E. 7.50%45. The Winter Wear Company has expected earnings before interest and taxes of $2,100, an unlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm?A. $9,900B. $10,852C. $11,748D. $12,054E. $12,70046. Gail's Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will be sold at par value. What is the levered value of the equity?A. $2.4 millionB. $2.7 millionC. $3.3 millionD. $3.7 millionE. $3.9 million47. The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital of 11%, and debt with both a book and face value of $12,000. The debt has an annual 8% coupon. The tax rate is 34%. What is the value of the firm?A. $48,600B. $50,000C. $52,680D. $56,667E. $60,60048. Scott's Leisure Time Sports is an unlevered firm with an after-tax net income of $86,000. The unlevered cost of capital is 10% and the tax rate is 34%. What is the value of this firm?A. $567,600B. $781,818C. $860,000D. $946,000E. $1,152,40049. An unlevered firm has a cost of capital of 14% and earnings before interest and taxes of $150,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $700,000 with a 7% annual coupon. The applicable tax rate is 35%. What is the value of the levered firm?A. $696,429B. $907,679C. $941,429D. $1,184,929E. $1,396,42950. The Spartan Co. has an unlevered cost of capital of 11%, a cost of debt of 8%, and a tax rate of 35%. What is the target debt-equity ratio if the targeted cost of equity is 12%?A. .44B. .49C. .51D. .56E. .6251. Hey Guys!, Inc. has debt with both a face and a market value of $3,000. This debt has a coupon rate of 7% and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. What is the firm's cost of equity?A. 13.25%B. 13.89%C. 13.92%D. 14.14%E. 14.25%52. Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%, and expected earnings before interest and taxes of $1,600. The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?A. 8.67%B. 9.34%C. 9.72%D. 9.99%E. 10.46%53. Walter's Distributors has a cost of equity of 13.84% and an unlevered cost of capital of 12%. The company has $5,000 in debt that is selling at par value. The levered value of the firm is $12,000 and the tax rate is 34%. What is the pre-tax cost of debt?A. 7.92%B. 8.10%C. 8.16%D. 8.84%E. 9.00%54. Rosita's has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita's unlevered cost of capital?A. 8.83%B. 12.30%C. 13.97%D. 14.08%E. 14.60%55. Your firm has a pre-tax cost of debt of 7% and an unlevered cost of capital of 13%. Your tax rate is 35% and your cost of equity is 15.26%. What is your debt-equity ratio?A. .43B. .49C. .51D. .54E. .5856. Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%. What is the cost of equity if the tax rate is 34%?A. 7.52%B. 8.78%C. 15.98%D. 16.83%E. 17.30%57. Your firm has a $250,000 bond issue outstanding. These bonds have a 7% coupon, pay interest semiannually, and have a current market price equal to 103% of face value. What is the amount of the annual interest tax shield given a tax rate of 35%?A. $6,125B. $6,309C. $9,500D. $17,500E. $18,02558. Bertha's Boutique has 2,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 9%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 34%?A. $58,500B. $60,100C. $60,750D. $61,200E. $62,25059. Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?A. $2,823B. $2,887C. $4,080D. $4,500E. $4,63360. A firm has debt of $5,000, equity of $16,000, a leveraged value of $8,900, a cost of debt of 8%, a cost of equity of 12%, and a tax rate of 34%. What is the firm's weighted average cost of capital?A. 7.29%B. 7.94%C. 8.87%D. 10.40%E. 11.05%61. A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes or other imperfections, its cost of equity capital with the new capital structure would be _____.A. 9%B. 10%C. 13%D. 14%E. None of the above.62. A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections?A. 10.0%B. 13.5%C. 14.4%D. 18.0%E. None of the above.63. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If there are no taxes or other imperfections, what would be its cost of equity if the debt-to-equity ratio were 0?A. 8%B. 10%C. 12%D. 14%E. 16%64. A firm has a debt-to-equity ratio of 1.20. If it had no debt, its cost of equity would be 15%. Its cost of debt is 10%. What is its cost of equity if there are no taxes or other imperfections?A. 10%B. 15%C. 18%D. 21%E. None of the above.65. If a firm is unlevered and has a cost of equity capital of 12%, what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 8%.A. 14.0%B. 14.67%C. 16.0%D. 20.0%E. None of the above.66. A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%, what would its cost of equity capital with the new capital structure be?A. 10.3%B. 11.0%C. 11.2%D. 13.9%E. None of the above.67. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If the corporate tax rate is 25%, what would its cost of equity be if the debt-to-equity ratio were 0?A. 11.11%B. 12.57%C. 13.33%D. 16.00%E. None of the above.68. A firm has a debt-to-equity ratio of .5. Its cost of equity is 22%, and its cost of debt is 16%. If the corporate tax rate is .40, what would its cost of equity be if the debt-to-equity ratio were 0?A. 14.00%B. 20.61%C. 21.07%D. 22.00%E. None of the above.69. A firm has a debt-to-equity ratio of 1.75. If it had no debt, its cost of equity would be 14%. Its cost of debt is 10%. What is its cost of equity if the corporate tax rate is 50%?A. 14.0%B. 16.0%C. 17.5%D. 21.0%E. None of the above.70. What is the cost of equity for a firm if the corporate tax rate is 40%? The firm has adebt-to-equity ratio of 1.5. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 10%.A. 17.4%B. 18.4%C. 19.6%D. 21.4%E. None of the above.71. A firm has a debt-to-equity ratio of 1.75. If it had no debt, its cost of equity would be 9%. Its cost of debt is 7%. What is its cost of equity if the corporate tax rate is 50%?A. 7.73%B. 10.00%C. 10.75%D. 12.50%E. None of the above.72. Batter's Home has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 30%?A. $52,000B. $60,000C. $62,500D. $68,000E. $72,00073. Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield?A. $2,800B. $3,000C. $3,400D. $3,800E. $7.00074. A firm has debt of $7,000, equity of $12,000, a leveraged value of $8,900, a cost of debt of 7%, a cost of equity of 14%, and a tax rate of 30%. What is the firm's weighted average cost of capital?A. 8.45%B. 9.90%C. 10.65%D. 12.50%E. 14.00%Essay Questions75. Based on MM with taxes and without taxes, how much time should a financial manager spend analyzing the capital structure of his firm? What if the analysis is based on the static theory?76. Explain homemade leverage and why it matters.77. In each of the theories of capital structure the cost of equity rises as the amount of debt increases. So why don't financial managers use as little debt as possible to keep the cost of equity down? After all, isn't the goal of the firm to maximize share value and minimize shareholder costs?Consider two firms, U and L, both with $50,000 in assets. Firm U is unlevered, and firm L has $20,000 of debt that pays 8% interest. Firm U has 1,000 shares outstanding, while firm L has 600 shares outstanding. Mike owns 20% of firm L and believes that leverage works in his favor. Steve tells Mike that this is an illusion, and that with the possibility of borrowing on his own account at 8% interest, he can replicate Mike's payout from firm L.78. Given a level of operating income of $2,500, show the specific strategy that Mike has in mind.79. After seeing Steve's analysis, Mike tells Steve that while his analysis looks good on paper, Steve will never be able to borrow at 8%, but would have to pay a more realistic rate of 12%. If Mike is right, what will Steve's payout be?80. Suppose the tax authorities allow firms to deduct their interest expense from operating income. Both firm U and firm L are in the 34% tax bracket. Show what happens to the market value of both firms if the debt held by firm L is permanent. Assume MM with taxes.。
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Chapter 15Long-Term Financing: An Introduction Multiple Choice Questions1. The book capital of a corporation is determined by:A. the sum of the capital in excess of par and the retained earnings.B. the par value of preferred stock.C. the sum of the treasury stock and the preferred stock.D. the number of shares issued multiplied by the par value of each share.E. the market price of the company's debt.2. Retained earnings are:A. the amount of cash that the firm has saved up.B. the difference between the net income earned and the dividends paid.C. the difference between the market price of the stock and the book value.D. the amount of stock repurchased.E. None of the above.3. The book value of the shareholders' ownership is represented by:A. the sum of the par value of common stock, the capital surplus and the accumulated retained earnings.B. the total assets minus the net worth.C. the sum of the preferred stock, debt and the capital surplus.D. the sum of the total assets minus the current liabilities.E. None of the above.4. Shares of stock that have been repurchased by the corporation are called:A. treasury stock.B. undistributed capital stock.C. retained equity.D. capital surplus shares.E. None of the above.5. The market value of the ownership of the firm equals:A. the market price of the stock times the number of shares outstanding.B. the sum of the market price of the bonds and the stock.C. the par value of the stock times the number of shares outstanding.D. the market price of the stock minus the retained earnings.E. None of the above.6. A grant of authority allowing someone else to vote shares of stock that you own is called:A. a power-of-share authorization.B. a proxy.C. a share authority grant (SAG).D. a restricted conveyance.E. None of the above.7. Unsecured corporate debt is called a(n):A. indenture.B. debenture.C. bond.D. mortgage.E. None of the above.8. A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):A. custodial account.B. sinking fund.C. retirement fund.D. irrevocable trustee fund.E. None of the above9. Debt that may be extinguished before maturity is referred to as:A. sinking-fund debt.B. debentures.C. callable debt.D. indenture debt.E. None of the above.10. If a long-term debt instrument is perpetual, it is called a(n):A. secured debt issue.B. subordinated debt issue.C. consol.D. capital debt issue.E. indenture.11. The amount of loan a person or firm borrows from a lender is the:A. creditor.B. indenture.C. debenture.D. principal.E. amortization.12. The written agreement between a corporation and its bondholders is called:A. the collateral agreement.B. the deed.C. the indenture.D. the deed of conveyance.E. None of the above.13. If cumulative voting is permitted:A. the total number of votes a shareholder has is equal to the number of shares owned.B. the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.C. the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.D. the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.E. None of the above.14. The market-to-book value ratio is implies growth and success when it is:A. greater than 0.B. less than 10.C. less than 0.D. less than 1.E. greater than 1.15. There are 3 directors' seats up for election. If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director, this is illustrative of:A. cumulative voting.B. absolute priority voting.C. sequential voting.D. straight voting.E. None of the above.16. If you own 1,000 shares of stock and you can cast only 1,000 votes fora particular director, then the stock features:A. cumulative voting.B. absolute priority voting.C. sequential voting.D. straight voting.E. None of the above.17. If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur.A. proxy fightB. stockholder derivative actionC. tender offerD. vote of confidenceE. None of the above.18. Shareholders usually have which of the following right(s)A. To elect board members, the authorizing of new shares and other matters of great importance to shareholders such as being acquired.B. To share proportionally in regular and liquidating dividends.C. To share proportionally in any new stock sold.D. All of the above.E. None of the above.19. Different classes of stock usually are issued to:A. maintain ownership control by holding the class of stock with greater voting rights.B. pay less in dividends between the classes of stock.C. fool investors into thinking that equity is equity and there is no difference in control or value features.D. extract perquisites without the other class of stockholders knowing.E. None of the above.20. Which of the following statements is falseA. Creditors do not have voting power.B. Payment on interest on debt in considered an expense, while payment of dividends is a return on capital.C. Unpaid debt is a liability of the firm, and if not paid, can result in liquidation of the firm. Unpaid common stock dividends cannot force liquidation.D. One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.E. None of the above.21. Corporations try to create hybrid securities that look like equity but are called debt because:A. debt interest expense is tax deductible.B. bankruptcy costs are eliminated or reduced.C. these securities have lower risk than debt.D. Both A and C.E. Both A and B.22. Technically speaking, a long-term corporate debt offering that features a specific attachment to corporate property is generally called:A. a debenture.B. a bond.C. a long-term liability.D. a preferred liability.E. None of the above.23. If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is:A. the amortization amount.B. the call price.C. the sinking fund amount.D. the spread premium.E. None of the above.24. If a debenture is subordinated, it:A. has a higher priority status than specified creditors.B. is secondary to equity.C. must give preference to the specified creditor in the event of default.D. has been issued because the company is in default.E. None of the above.25. Not paying the dividends on a cumulative preferred issue may result in:A. preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid.B. voting rights are granted to preferred stockholders if preferred dividends are in arrears.C. no payment of dividends to common shareholders.D. Both A and B.E. Both B and C.26. Preferred stock has both a tax advantage and a tax disadvantage. These two are:A. in default there are no taxes and dividends are taxed in corporate hands at 70%.B. corporate dividends are taxed on 30% of the dividends received and expenses are deductible.C. dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.D. dividends are fully tax deductible but are not equity capital.E. None of the above.27. Preferred stock may be desirable to issue for which of the following reason(s)A. If there is no taxable income, preferred stock does not impose a tax penalty.B. The failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy.C. Preferred dividends are not tax deductible and therefore will not provide a tax shield but will reduce net income.D. Both B and C.E. Both A and B.28. Preferred stock may exist because:A. losses before income taxes prevent a company from enjoying the tax advantages of debt interest while there is no tax advantage for preferred dividends.B. an advantage exists for the firm; preferred shareholders can not force the company into bankruptcy because of unpaid dividends.C. corporations get a 70% tax exemption on preferred dividends received.D. All of the above.E. None of the above.29. The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n):A. maintenance of security provision.B. collateral restriction.C. affirmative indenture.D. restrictive covenant.E. None of the above.30. What percentage of the dividends received by one corporation from another is taxableA. 15%B. 30%C. 34%D. 70%E. 100%31. Which of the following statements about preferred stock is trueA. Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.B. Unpaid dividends on preferred stock are a debt of the corporation.C. If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.D. There is no difference in the voting rights of preferred and common stockholders.E. None of the above.32. If a debt issue is callable, the call price is generally ____ par.A. greater thanB. less thanC. equal toD. unrelated toE. It varies widely based on the risk of the firm.33. There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:A. the change in the accounting rules of the period.B. the difference between tax accounting and accounting for financial accounting purposes.C. a large increase in the market value of equity that was greater than the increase in debt.D. All of the above.E. None of the above.34. Based on historical experience, which of the following best describes the "pecking order" of long-term financing strategy in the .A. Long-term debt first, new common equity, internal financing last.B. Long-term debt first, internal financing, new common equity last.C. Internal financing first, new common equity, long-term borrowing last.D. Internal financing first, long-term borrowing, new common equity last.E. None of the above.35. Financial deficits are created when:A. profits and retained earnings are greater than the capital-spending requirement.B. profits and retained earnings are less than the capital-spending requirement.C. profits and retained earnings are equal to the capital-spending requirement.D. All of the above.E. None of the above.36. Financial economists prefer to use market values when measuring debt ratios because:A. market values are more stable than book values.B. market values are a better reflection of current value than historical value.C. market values are readily available and do not have to be calculated like book values.D. market values are more difficult to calculate which makes financial economists more valuable.E. None of the above.37. Corporate financial officers prefer to use book values when measuring debt ratios because:A. book values are more stable than market values.B. debt covenant restriction are usually expressed in book value terms.C. rating agencies measure debt ratios in book values terms.D. All of the above.E. None of the above.38. Rockwell Corporation had net income of $150,000 for the year ending 2008. The company decided to payout 40% of earnings per share as a dividend. Rockwell has 120,000 shares issued and outstanding. What are the retained earnings for 2008A. $40,000B. $60,000C. $90,000D. $150,000E. None of the above39. Nelson Company had equity accounts in 2008 as follows:Projected income is $150,000 and 40% of this amount will be paid out immediately as dividends. What will the ending retained earnings account beA. $90,000B. $92,000C. $122,000D. $210,000E. $242,00040. Holden Bicycles has 1,000 shares outstanding each with a par value of $. If they are sold to shareholders at $10 each, what would the capital surplus beA. $100B. $900C. $9,900D. $10,000E. $11,00041. The Lory Bookstore used internal financing as a source of long-term financing for 80% of its total needs in 2008. The company borrowed an additional 27% of its total needs in the long-term debt markets in 2008. What were Lory's net new stock issues in that yearA. -20%B. -7%C. 7%D. 20%E. 27%42. David's Building Equipment (DBE) had net income of $200,000 for the year ending 2008. The company decided to payout 30% of earnings per share as a dividend. DBE has 50,000 shares issued and outstanding. What are the retained earnings for 2008A. $60,000B. $140,000C. $150,000D. $200,000E. None of the above.43. Alexandra Investments had equity accounts in 2008 as follows:Projected income is $200,000 and 20% of this amount will be paid out immediately as dividends. What will the ending retained earnings account beA. $160,000B. $250,000C. $270,000D. $410,000E. $470,00044. Michael's Motor Scooters has 1,000 shares outstanding each with a par value of $. If they are sold to shareholders at $5 each, what would the capital surplus beA. $4,400B. $4,500C. $4,750D. $4,950E. $5,00045. Calhoun Computech used internal financing as a source of long-term financing for 80% of its total needs in 2008. The company borrowed an additional 15% of its total needs in the long-term debt markets in 2008. What were Calhoun's net new stock issues, in percentage terms, for 2008A. -10%B. -5%C. 5%D. 10%E. 15%Essay QuestionsInformation on shareholder's equity as currently shown on the books of the Eaton Corporation is given as:46. From this information, calculate Eaton's book value per share.47. Rework the shareholder's equity as it appears on the books if the company issues 40,000 new shares of common at $70 per share.48. Preferred Stock, as a hybrid security, presents somewhat of a puzzle as to why they are issued. What elements give rise to the puzzle and how is it explained49. Different countries have different sources of funds. For example, in the United States, internally generated funds count for over 4/5 of all funds while in Japan, it is about ½ with externally generated funds making up the remainder. The disparities are less in the United Kingdom and Germany, with about 2/3 of funds coming from internal sources. Discuss this disparity and why it might exist.Chapter 15 Long-Term Financing: An Introduction Answer KeyMultiple Choice Questions1. The book capital of a corporation is determined by:A.the sum of the capital in excess of par and the retained earnings.B.the par value of preferred stock.C.the sum of the treasury stock and the preferred stock.D.the number of shares issued multiplied by the par value of each share.E.the market price of the company's debt.Difficulty level: EasyTopic: BOOK CAPITALType: DEFINITIONS2. Retained earnings are:A.the amount of cash that the firm has saved up.B.the difference between the net income earned and the dividends paid.C.the difference between the market price of the stock and the book value.D.the amount of stock repurchased.E.None of the above.Difficulty level: EasyTopic: RETAINED EARNINGSType: DEFINITIONS3. The book value of the shareholders' ownership is represented by:A.the sum of the par value of common stock, the capital surplus and the accumulated retained earnings.B.the total assets minus the net worth.C.the sum of the preferred stock, debt and the capital surplus.D.the sum of the total assets minus the current liabilities.E.None of the above.Difficulty level: MediumTopic: BOOK VALUEType: DEFINITIONS4. Shares of stock that have been repurchased by the corporation are called:A.treasury stock.B.undistributed capital stock.C.retained equity.D.capital surplus shares.E.None of the above.Difficulty level: EasyTopic: TREASURY STOCKType: DEFINITIONS5. The market value of the ownership of the firm equals:A.the market price of the stock times the number of shares outstanding.B.the sum of the market price of the bonds and the stock.C.the par value of the stock times the number of shares outstanding.D.the market price of the stock minus the retained earnings.E.None of the above.Difficulty level: EasyTopic: MARKET VALUE OF EQUITYType: DEFINITIONS6. A grant of authority allowing someone else to vote shares of stock that you own is called:A. a power-of-share authorization.B. a proxy.C. a share authority grant (SAG).D. a restricted conveyance.E.None of the above.Difficulty level: EasyTopic: PROXYType: DEFINITIONS7. Unsecured corporate debt is called a(n):A.indenture.B.debenture.C.bond.D.mortgage.E.None of the above.Difficulty level: EasyTopic: DEBENTUREType: DEFINITIONS8. A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):A.custodial account.B.sinking fund.C.retirement fund.D.irrevocable trustee fund.E.None of the aboveDifficulty level: EasyTopic: SINKING FUNDType: DEFINITIONS9. Debt that may be extinguished before maturity is referred to as:A.sinking-fund debt.B.debentures.C.callable debt.D.indenture debt.E.None of the above.Difficulty level: EasyTopic: CALLABLE DEBTType: DEFINITIONS10. If a long-term debt instrument is perpetual, it is called a(n):A.secured debt issue.B.subordinated debt issue.C.consol.D.capital debt issue.E.indenture.Difficulty level: EasyTopic: CONSOL OR PERPETUAL DEBTType: DEFINITIONS11. The amount of loan a person or firm borrows from a lender is the:A.creditor.B.indenture.C.debenture.D.principal.E.amortization.Difficulty level: EasyTopic: LOAN PRINCIPALType: DEFINITIONS12. The written agreement between a corporation and its bondholders is called:A.the collateral agreement.B.the deed.C.the indenture.D.the deed of conveyance.E.None of the above.Difficulty level: EasyTopic: INDENTUREType: DEFINITIONS13. If cumulative voting is permitted:A.the total number of votes a shareholder has is equal to the number of shares owned.B.the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.C.the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.D.the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.E.None of the above.Difficulty level: EasyTopic: CUMULATIVE VOTINGType: CONCEPTS14. The market-to-book value ratio is implies growth and success when it is:A.greater than 0.B.less than 10.C.less than 0.D.less than 1.E.greater than 1.Difficulty level: MediumTopic: MARKET-TO-BOOK RATIOType: CONCEPTS15. There are 3 directors' seats up for election. If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director, this is illustrative of:A.cumulative voting.B.absolute priority voting.C.sequential voting.D.straight voting.E.None of the above.Difficulty level: EasyTopic: CUMULATIVE VOTINGType: CONCEPTS16. If you own 1,000 shares of stock and you can cast only 1,000 votes fora particular director, then the stock features:A.cumulative voting.B.absolute priority voting.C.sequential voting.D.straight voting.E.None of the above.Difficulty level: EasyTopic: STRAIGHT VOTINGType: CONCEPTS17. If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur.A.proxy fightB.stockholder derivative actionC.tender offerD.vote of confidenceE.None of the above.Difficulty level: EasyTopic: PROXY FIGHTType: CONCEPTS18. Shareholders usually have which of the following right(s)A.To elect board members, the authorizing of new shares and other matters of great importance to shareholders such as being acquired.B.To share proportionally in regular and liquidating dividends.C.To share proportionally in any new stock sold.D.All of the above.E.None of the above.Difficulty level: EasyTopic: SHAREHOLDER RIGHTSType: CONCEPTS19. Different classes of stock usually are issued to:A.maintain ownership control by holding the class of stock with greater voting rights.B.pay less in dividends between the classes of stock.C.fool investors into thinking that equity is equity and there is no difference in control or value features.D.extract perquisites without the other class of stockholders knowing.E.None of the above.Difficulty level: MediumTopic: CLASSES OF STOCKType: CONCEPTS20. Which of the following statements is falseA.Creditors do not have voting power.B.Payment on interest on debt in considered an expense, while payment of dividends is a return on capital.C.Unpaid debt is a liability of the firm, and if not paid, can result in liquidation of the firm. Unpaid common stock dividends cannot force liquidation.D.One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.E.None of the above.Difficulty level: MediumTopic: COSTS OF LONG TERM FINANCINGType: CONCEPTS21. Corporations try to create hybrid securities that look like equity but are called debt because:A.debt interest expense is tax deductible.B.bankruptcy costs are eliminated or reduced.C.these securities have lower risk than debt.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: HYBRID SECURITIESType: CONCEPTS22. Technically speaking, a long-term corporate debt offering that features a specific attachment to corporate property is generally called:A. a debenture.B. a bond.C. a long-term liability.D. a preferred liability.E.None of the above.Difficulty level: EasyTopic: BONDType: CONCEPTS23. If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is:A.the amortization amount.B.the call price.C.the sinking fund amount.D.the spread premium.E.None of the above.Difficulty level: EasyTopic: CALLABLE DEBTType: CONCEPTS24. If a debenture is subordinated, it:A.has a higher priority status than specified creditors.B.is secondary to equity.C.must give preference to the specified creditor in the event of default.D.has been issued because the company is in default.E.None of the above.Difficulty level: MediumTopic: SUBORDINATED DEBENTUREType: CONCEPTS25. Not paying the dividends on a cumulative preferred issue may result in:A.preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid.B.voting rights are granted to preferred stockholders if preferred dividends are in arrears.C.no payment of dividends to common shareholders.D.Both A and B.E.Both B and C.Difficulty level: MediumTopic: PREFERRED STOCK AND DIVIDENDSType: CONCEPTS26. Preferred stock has both a tax advantage and a tax disadvantage. These two are:A.in default there are no taxes and dividends are taxed in corporate hands at 70%.B.corporate dividends are taxed on 30% of the dividends received and expenses are deductible.C.dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.D.dividends are fully tax deductible but are not equity capital.E.None of the above.Difficulty level: MediumTopic: PREFERRED STOCKType: CONCEPTS27. Preferred stock may be desirable to issue for which of the following reason(s)A.If there is no taxable income, preferred stock does not impose a tax penalty.B.The failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy.C.Preferred dividends are not tax deductible and therefore will not provide a tax shield but will reduce net income.D.Both B and C.E.Both A and B.Difficulty level: ChallengeTopic: PREFERRED STOCKType: CONCEPTS28. Preferred stock may exist because:A.losses before income taxes prevent a company from enjoying the tax advantages of debt interest while there is no tax advantage for preferred dividends.B.an advantage exists for the firm; preferred shareholders can not force the company into bankruptcy because of unpaid dividends.C.corporations get a 70% tax exemption on preferred dividends received.D.All of the above.E.None of the above.Difficulty level: MediumTopic: PREFERRED STOCKType: CONCEPTS29. The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n):A.maintenance of security provision.B.collateral restriction.C.affirmative indenture.D.restrictive covenant.E.None of the above.Difficulty level: EasyTopic: RESTRICTIVE COVENANTType: CONCEPTS30. What percentage of the dividends received by one corporation from another is taxableA.15%B.30%C.34%D.70%E.100%Difficulty level: EasyTopic: TAXABLE CORPORATE DIVIDENDSType: CONCEPTS31. Which of the following statements about preferred stock is trueA.Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.B.Unpaid dividends on preferred stock are a debt of the corporation.C.If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.D.There is no difference in the voting rights of preferred and common stockholders.E.None of the above.Difficulty level: MediumTopic: PREFERRED STOCKType: CONCEPTS32. If a debt issue is callable, the call price is generally ____ par.A.greater thanB.less thanC.equal toD.unrelated toE.It varies widely based on the risk of the firm.Difficulty level: EasyTopic: CALLABLE DEBTType: CONCEPTS33. There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:A.the change in the accounting rules of the period.B.the difference between tax accounting and accounting for financial accounting purposes.C. a large increase in the market value of equity that was greater than the increase in debt.D.All of the above.E.None of the above.Difficulty level: EasyTopic: DEBT FINANCING TRENDSType: CONCEPTS。
罗斯公司理财题库全集
Chapter 12 An Alternative View of Risk and Return: The Arbitrage Pricing TheoryMultiple Choice Questions1. In the equation R = + U, the three symbols stand for:A. average return, expected return, and unexpected return.B. required return, expected return, and unbiased return.C. actual total return, expected return, and unexpected return.D. required return, expected return, and unbiased risk.E. risk, expected return, and unsystematic risk.2. The acronym APT stands for:A. Arbitrage Pricing Techniques.B. Absolute Profit Theory.C. Arbitrage Pricing Theory.D. Asset Puting Theory.E. Assured Price Techniques.3. The acronym CAPM stands for:A. Capital Asset Pricing Model.B. Certain Arbitrage Pressure Model.C. Current Arbitrage Prices Model.D. Cumulative Asset Price Model.E. None of the above.4. The unexpected return on a security, U, is made up of:A. market risk and systematic risk.B. systematic risk and unsystematic risk.C. idiosyncratic risk and unsystematic risk.D. expected return and market risk.E. expected return and idiosyncratic risk.5. Systematic risk is defined as:A. a risk that specifically affects an asset or small group of assets.B. any risk that affects a large number of assets.C. any risk that has a huge impact on the return of a security.D. the random component of return.E. None of the above.6. The term Corr(ε R, ε T) = 0 tells us that:A. all error terms of company R and T are 0.B. the unsystematic risk of companies R and T is unrelated or uncorrelated.C. the correlation between the returns of companies R and T is -1.D. the systematic risk of companies R and T is unrelated.E. None of the above.7. A factor is a variable that:A. affects the returns of risky assets in a systematic fashion.B. affects the returns of risky assets in an unsystematic fashion.C. correlates with risky asset returns in a unsystematic fashion.D. does not correlate with the returns of risky assets in an systematic fashion.E. None of the above.8. A security that has a beta of zero will have an expected return of:A. zero.B. the market risk premium.C. the risk free rate.D. less than the risk free rate but not negative.E. less than the risk free rate which can be negative.9. Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?A. The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.B. The price will change little, if at all, since the impact is primarily in the future.C. The price will change little, if at all, since the market considers this information unimportant.D. The price will change little, if at all, since the market considers this information untrue.E. The price will change little, if at all, since the market has already included this information in the security's price.10. Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:A. the expected part of the announcement.B. market inefficiency.C. the unexpected part of the announcement.D. the systematic risk.E. None of the above.11. A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.A. negative; anticipatedB. positive; anticipatedC. negative; unanticipatedD. positive; unanticipatedE. None of the above.12. If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:A. no effect on Company B's, a newspaper, stock price because it is a systematic risk element.B. no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.C. a large effect on Company B's, a newspaper, stock price because it is a systematic risk element.D. a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.E. None of the above.13. What would not be true about a GNP beta?A. If a stock's βGNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.B. If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP.C. It is a measure of risk.D. It measures the impact of systematic risk associated with GNP.E. None of the above.14. If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, β, would result in a change inI.any security return of ___ βIA. 9.2B. 3.2C. -3.2D. 3.0E. 6.215. In a portfolio of risky assets, the response to a factor, Fi, can be determined by:A. summing the weightedi s and multiplying by the factor Fi.B. summing the Fis.C. adding the average weighted expected returns.D. summing the weighted random errors.E. All of the above.16. In the one factor (APT) model, the characteristic line to estimate i passes through the origin, unlike the estimate used in the CAPM because:A. the relationship is between the actual return on a security and the market index.B. the relationship measures the change in the security return over time versus the change in the market return.C. the relationship measures the change in excess return on a security versus GNP.D. the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.E. Cannot be determined without actual data.17. The betas along with the factors in the APT adjust the expected return for:A. calculation errors.B. unsystematic risks.C. spurious correlations of factors.D. differences between actual and expected levels of factors.E. All of the above.18. The single factor APT model that resembles the market model uses _________ as the single factor.A. arbitrage feesB. GNPC. the inflation rateD. the market returnE. the risk-free return19. For a diversified portfolio including a large number of stocks, the:A. weighted average expected return goes to zero.B. weighted average of the betas goes to zero.C. weighted average of the unsystematic risk goes to zero.D. return of the portfolio goes to zero.E. return on the portfolio equals the risk-free rate.20. Which of the following statements is true?A. A well-diversified portfolio has negligible systematic risk.B. A well-diversified portfolio has negligible unsystematic risk.C. An individual security has negligible systematic risk.D. An individual security has negligible unsystematic risk.E. Both A and D.21. Assuming that the single factor APT model applies, the beta for the market portfolio is:A. zero.B. one.C. the average of the risk free beta and the beta for the highest risk security.D. impossible to calculate without collecting sample data.E. None of the above.22. In normal market conditions if a security has a negative beta:A. the security always has a positive return.B. the security has an expected return above the risk-free return.C. the security has an expected return less than the risk-free rate.D. the security has an expected return equal to the market portfolio.E. Both A and B.23. A criticism of the CAPM is that it:A. ignores the return on the market portfolio.B. ignores the risk-free return.C. requires a single measure of systematic risk.D. utilizes too many factors.E. None of the above.24. To estimate the cost of equity capital for a firm using the CAPM, it is necessary to have:A. company financial leverage, beta, and the market risk premium.B. company financial leverage, beta, and the risk-free rate.C. beta, company financial leverage, and the industry beta.D. beta, company financial leverage, and the market risk premium.E. beta, the risk-free rate, and the market risk premium.25. An advantage of the APT over CAPM is:A. APT can handle multiple factors.B. if the factors can be properly identified, the APT may have more explanation/predictive power for returns.C. the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.D. Both A and B.E. All of the above.26. Parametric or empirical models rely on:A. security betas explaining systematic factor relationships.B. finding regularities and relations in past market data.C. there being no true explanations of pricing relationships.D. always being able to find the exception to the rule.E. None of the above27. A growth stock portfolio and a value portfolio might be characterized:A. each by their P/E relative to the index P/E; high P/E for growth and lower for value.B. as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.C. low unsystematic risk and high systematic risk respectively.D. moderate systematic risk and zero systematic risk respectively.E. None of the above.28. Style portfolios are characterized by:A. their stock attributes; P/Es less than the market P/E are value funds.B. their systematic factors, higher systematic factors are benchmark portfolios.C. their stock attributes; higher stock attribute factors are benchmark portfolios.D. their systematic factors, P/Es greater than the market are value portfolios.E. There is no difference between systematic factors and stock attributes.29. The most realistic APT model would likely include:A. multiple factors.B. only one factor.C. a factor to measure inflation.D. Both A and C.E. Both B and C.30. Which of the following statements is/are true?A. Both APT and CAPM argue that expected excess return must be proportional to the beta(s).B. APT and CAPM are the only approaches to measure expected returns in risky assets.C. Both CAPM and APT are risk-based models.D. Both A and B.E. Both A and C.31. Three factors likely to occur in the APT model are:A. unemployment, inflation, and current rates.B. inflation, GNP, and interest rates.C. current rates, inflation and change in housing prices.D. unemployment, college tuition, and GNP.E. This cannot be determined or even estimated.32. Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:A. very similarly to the CAPM via the beta of the security.B. in terms of individual intersecurity correlation versus the beta of the CAPM.C. via the industry wide or marketwide factors creating correlation between securities.D. as the standardized deviation of the covariance.E. None of the above.33. The Fama-French three factor model includes the following factors:A. beta, expected return on the market, risk free rate of interest, a size factor, and a value factor.B. the market risk premium, a volume factor, and a size factor.C. beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor.D. the yield on corporate bonds, a size factor, and a market factor.E. None of the above.34. A value company is defined as one that:A. tends to have a lower average return than a growth company.B. tends to have higher average return than a growth company.C. has a high ratio of book equity to market equity.D. a and b.E. a and c.35. The Fama-French three factor model predicts the expected return on a portfolio increases:A. linearly with its factor loading of the size factor.B. linearly with its factor loading of the volume.C. exponentially with its factor loading of the size factor.D. exponentially with its factor loading of the volume factor.E. None of the above.36. The systematic response coefficient for productivity, β, would produce anpif the expected rate of unexpected change in any security return of __ βPproductivity was 1.5% and the actual rate was 2.25%.A. 0.75%B. -0.75%C. 2.25%D. -2.25%E. 1.5%37. Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.5. The portfolio has a beta of:A. 0.00B. 0.50C. 0.75D. 1.00E. 1.5038. Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common stock is:A. 3.2%.B. 4.0%.C. 7.2%.D. 8.0%.E. 9.0%.39. Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:A. 0.89.B. 1.60.C. 2.40.D. 3.00.E. It is impossible to calculate beta without the inflation rate.Suppose that we have identified three important systematic risk factors given by exports, inflation, and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2%, and 2%. The factor betas are given by βEX = 1.8, βI = 0.7, and βIP = 1.0.40. If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock's total return.A. 2.95%B. 4.95%C. 6.55%D. 7.40%E. 8.85%41. Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.A. 7.95%B. 9.95%C. 11.55%D. 7.90%E. 9.35%42. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.A. -4.05%B. -2.05%C. 4.55%D. 0.40%E. 1.85%43. What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.A. 4%B. 5%C. 6%D. 7%E. 8%Essay Questions44. An investor is considering the three stocks given below:Calculate the expected return and beta of a portfolio equally weighted between stocks B and C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stocks B and A.45. Explain the conceptual differences in the theoretical development of the CAPM and APT.46. You have a 3 factor model to explain returns. Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta. What do these represent and how do they relate to the actual return?47. Discuss the Fama-French three factor model; both what it means and the factors of the model.Chapter 12 An Alternative View of Risk and Return: The Arbitrage Pricing Theory Answer KeyMultiple Choice Questions1. In the equation R = + U, the three symbols stand for:A.average return, expected return, and unexpected return.B.required return, expected return, and unbiased return.C.actual total return, expected return, and unexpected return.D.required return, expected return, and unbiased risk.E.risk, expected return, and unsystematic risk.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: DEFINITIONS2. The acronym APT stands for:A.Arbitrage Pricing Techniques.B.Absolute Profit Theory.C.Arbitrage Pricing Theory.D.Asset Puting Theory.E.Assured Price Techniques.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: DEFINITIONS3. The acronym CAPM stands for:A.Capital Asset Pricing Model.B.Certain Arbitrage Pressure Model.C.Current Arbitrage Prices Model.D.Cumulative Asset Price Model.E.None of the above.Difficulty level: EasyTopic: CAPITAL ASSET PRICING MODELType: DEFINITIONS4. The unexpected return on a security, U, is made up of:A.market risk and systematic risk.B.systematic risk and unsystematic risk.C.idiosyncratic risk and unsystematic risk.D.expected return and market risk.E.expected return and idiosyncratic risk.Difficulty level: MediumTopic: UNEXPECTED RETURNType: DEFINITIONS5. Systematic risk is defined as:A. a risk that specifically affects an asset or small group of assets.B.any risk that affects a large number of assets.C.any risk that has a huge impact on the return of a security.D.the random component of return.E.None of the above.Difficulty level: EasyTopic: SYSTEMATIC RISKType: DEFINITIONS6. The term Corr(ε R, ε T) = 0 tells us that:A.all error terms of company R and T are 0.B.the unsystematic risk of companies R and T is unrelated or uncorrelated.C.the correlation between the returns of companies R and T is -1.D.the systematic risk of companies R and T is unrelated.E.None of the above.Difficulty level: MediumTopic: CORRELATIONType: DEFINITIONS7. A factor is a variable that:A.affects the returns of risky assets in a systematic fashion.B.affects the returns of risky assets in an unsystematic fashion.C.correlates with risky asset returns in a unsystematic fashion.D.does not correlate with the returns of risky assets in an systematic fashion.E.None of the above.Difficulty level: EasyTopic: FACTORSType: DEFINITIONS8. A security that has a beta of zero will have an expected return of:A.zero.B.the market risk premium.C.the risk free rate.D.less than the risk free rate but not negative.E.less than the risk free rate which can be negative.Difficulty level: MediumTopic: ZERO BETAType: DEFINITIONS9. Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?A.The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.B.The price will change little, if at all, since the impact is primarily in the future.C.The price will change little, if at all, since the market considers this information unimportant.D.The price will change little, if at all, since the market considers this information untrue.E.The price will change little, if at all, since the market has already included this information in the security's price.Difficulty level: EasyTopic: ANNOUNCEMENT EFFECTSType: CONCEPTS10. Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:A.the expected part of the announcement.B.market inefficiency.C.the unexpected part of the announcement.D.the systematic risk.E.None of the above.Difficulty level: MediumTopic: ANNOUNCEMENT EFFECTSType: CONCEPTS11. A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.A.negative; anticipatedB.positive; anticipatedC.negative; unanticipatedD.positive; unanticipatedE.None of the above.Difficulty level: MediumTopic: INFLATION AND BETAType: CONCEPTS12. If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:A.no effect on Company B's, a newspaper, stock price because it is a systematic risk element.B.no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.C. a large effect on Company B's, a newspaper, stock price because it is a systematic risk element.D. a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.E.None of the above.Difficulty level: EasyTopic: UNSYSTEMATIC RISKType: CONCEPTS13. What would not be true about a GNP beta?A.If a stock's βGNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.B.If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP.C.It is a measure of risk.D.It measures the impact of systematic risk associated with GNP.E.None of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. If the expected rate of inflation was 3% and the actual rate was 6.2%; the, would result in a change in systematic response coefficient from inflation, βI.any security return of ___ βIA.9.2B. 3.2C.-3.2D. 3.0E. 6.2Difficulty level: EasyTopic: FACTORS AND INFLATIONType: CONCEPTS15. In a portfolio of risky assets, the response to a factor, Fi, can be determined by:A.summing the weighted βi s and multiplying by the factor Fi.B.summing the Fis.C.adding the average weighted expected returns.D.summing the weighted random errors.E.All of the above.Difficulty level: MediumTopic: FACTORSType: CONCEPTS16. In the one factor (APT) model, the characteristic line to estimate βi passes through the origin, unlike the estimate used in the CAPM because:A.the relationship is between the actual return on a security and the market index.B.the relationship measures the change in the security return over time versus the change in the market return.C.the relationship measures the change in excess return on a security versus GNP.D.the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.E.Cannot be determined without actual data.Difficulty level: ChallengeTopic: APT AND CAPMType: CONCEPTS17. The betas along with the factors in the APT adjust the expected return for:A.calculation errors.B.unsystematic risks.C.spurious correlations of factors.D.differences between actual and expected levels of factors.E.All of the above.Difficulty level: ChallengeTopic: BETAS AND FACTORSType: CONCEPTS18. The single factor APT model that resembles the market model uses _________ as the single factor.A.arbitrage feesB.GNPC.the inflation rateD.the market returnE.the risk-free returnDifficulty level: EasyTopic: SINGLE FACTOR APTType: CONCEPTS19. For a diversified portfolio including a large number of stocks, the:A.weighted average expected return goes to zero.B.weighted average of the betas goes to zero.C.weighted average of the unsystematic risk goes to zero.D.return of the portfolio goes to zero.E.return on the portfolio equals the risk-free rate.Difficulty level: EasyTopic: UNSYSTEMATIC RISK AND DIVERSIFICATIONType: CONCEPTS20. Which of the following statements is true?A. A well-diversified portfolio has negligible systematic risk.B. A well-diversified portfolio has negligible unsystematic risk.C.An individual security has negligible systematic risk.D.An individual security has negligible unsystematic risk.E.Both A and D.Difficulty level: EasyTopic: UNSYSTEMATIC RISK AND DIVERSIFICATIONType: CONCEPTS21. Assuming that the single factor APT model applies, the beta for the market portfolio is:A.zero.B.one.C.the average of the risk free beta and the beta for the highest risk security.D.impossible to calculate without collecting sample data.E.None of the above.Difficulty level: EasyTopic: SINGLE FACTOR APTType: CONCEPTS22. In normal market conditions if a security has a negative beta:A.the security always has a positive return.B.the security has an expected return above the risk-free return.C.the security has an expected return less than the risk-free rate.D.the security has an expected return equal to the market portfolio.E.Both A and B.Difficulty level: MediumTopic: NEGATIVE BETAType: CONCEPTS23. A criticism of the CAPM is that it:A.ignores the return on the market portfolio.B.ignores the risk-free return.C.requires a single measure of systematic risk.D.utilizes too many factors.E.None of the above.Difficulty level: EasyTopic: CAPMType: CONCEPTS24. To estimate the cost of equity capital for a firm using the CAPM, it is necessary to have:pany financial leverage, beta, and the market risk premium.pany financial leverage, beta, and the risk-free rate.C.beta, company financial leverage, and the industry beta.D.beta, company financial leverage, and the market risk premium.E.beta, the risk-free rate, and the market risk premium.Difficulty level: EasyTopic: CAPMType: CONCEPTS25. An advantage of the APT over CAPM is:A.APT can handle multiple factors.B.if the factors can be properly identified, the APT may have more explanation/predictive power for returns.C.the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.D.Both A and B.E.All of the above.Difficulty level: EasyTopic: APT AND CAPMType: CONCEPTS26. Parametric or empirical models rely on:A.security betas explaining systematic factor relationships.B.finding regularities and relations in past market data.C.there being no true explanations of pricing relationships.D.always being able to find the exception to the rule.E.None of the aboveDifficulty level: ChallengeTopic: EMPIRICAL MODELINGType: CONCEPTS27. A growth stock portfolio and a value portfolio might be characterized:A.each by their P/E relative to the index P/E; high P/E for growth and lower for value.B.as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.C.low unsystematic risk and high systematic risk respectively.D.moderate systematic risk and zero systematic risk respectively.E.None of the above.Difficulty level: MediumTopic: PORTFOLIOSType: CONCEPTS28. Style portfolios are characterized by:A.their stock attributes; P/Es less than the market P/E are value funds.B.their systematic factors, higher systematic factors are benchmark portfolios.C.their stock attributes; higher stock attribute factors are benchmark portfolios.D.their systematic factors, P/Es greater than the market are value portfolios.E.There is no difference between systematic factors and stock attributes. Difficulty level: MediumTopic: STYLE PORTFOLIOSType: CONCEPTS29. The most realistic APT model would likely include:A.multiple factors.B.only one factor.C. a factor to measure inflation.D.Both A and C.E.Both B and C.Difficulty level: MediumTopic: APTType: CONCEPTS30. Which of the following statements is/are true?A.Both APT and CAPM argue that expected excess return must be proportional to the beta(s).B.APT and CAPM are the only approaches to measure expected returns in risky assets.C.Both CAPM and APT are risk-based models.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: APT AND CAPMType: CONCEPTS31. Three factors likely to occur in the APT model are:A.unemployment, inflation, and current rates.B.inflation, GNP, and interest rates.C.current rates, inflation and change in housing prices.D.unemployment, college tuition, and GNP.E.This cannot be determined or even estimated.Difficulty level: MediumTopic: APT FACTORSType: CONCEPTS32. Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:A.very similarly to the CAPM via the beta of the security.B.in terms of individual intersecurity correlation versus the beta of the CAPM.C.via the industry wide or marketwide factors creating correlation between securities.D.as the standardized deviation of the covariance.E.None of the above.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: CONCEPTS。
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Chapter 09How to Value Stocks Multiple Choice Questions1. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.A. zero growthB. dividend growthC. capital pricingD. earnings capitalizationE. differential growth2. Next year's annual dividend divided by the current stock price is called the:A. yield to maturity.B. total yield.C. dividend yield.D. capital gains yield.E. earnings yield.3. The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.A. currentB. totalC. dividendD. capital gainsE. earnings4. A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.A. dual classB. cumulativeC. deferredD. preferredE. common5. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:A. retained earnings.B. net income.C. dividends.D. redistributions.E. infused equity.6. The constant dividend growth model is:A. generally used in practice because most stocks have a constant growth rate.B. generally used in practice because the historical growth rate of most stocks is constant.C. generally not used in practice because most stocks grow at a non constant rate.D. generally not used in practice because the constant growth rate is usually higher than the required rate of return.E. based on the assumption Dow 30 represents a good estimate of the market index.7. The constant dividend growth model:I. assumes that dividends increase at a constant rate forever.II. can be used to compute a stock price at any point of time.III. states that the market price of a stock is only affected by the amount of the dividend. IV. considers capital gains but ignores the dividend yield.A. I onlyB. II onlyC. III and IV onlyD. I and II onlyE. I, II, and III only8. The underlying assumption of the dividend growth model is that a stock is worth:A. the same amount to every investor regardless of their desired rate of return.B. the present value of the future income which the stock generates.C. an amount computed as the next annual dividend divided by the market rate of return.D. the same amount as any other stock that pays the same current dividend and has the same required rate of return.E. an amount computed as the next annual dividend divided by the required rate of return.9. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:A. market values of all stocks to increase, all else constant.B. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.C. market values of all stocks to decrease, all else constant.D. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.E. dividend growth rates to increase to offset this change.10. Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today's value.A. 4B. 5C. 6D. 7E. 811. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the stock when it reaches constant growth in year:A. 3B. 4C. 5D. 6E. 712. Differential growth refers to a firm that increases its dividend by:A. three or more percent per year.B. a rate which is most likely not sustainable over an extended period of time.C. a constant rate of two or more percent per year.D. $.10 or more per year.E. an amount in excess of $.10 a year.13. The total rate of return earned on a stock is comprised of which two of the following?I. current yieldII. yield to maturityIII. dividend yieldIV. capital gains yieldA. I and II onlyB. I and IV onlyC. II and III onlyD. II and IV onlyE. III and IV only14. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.A. remain constantB. decrease by 5%C. increase by 5%D. increase by 10%E. increase by 15%15. The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:A. must always show a current liability of $1,000 for dividends payable.B. is obligated to continue paying $1 per share per year.C. will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis.D. has a liability which must be paid at a later date should the company miss paying an annual dividend payment.E. must still declare each dividend before it becomes an actual company liability.16. The value of common stock today depends on:A. the expected future holding period and the discount rate.B. the expected future dividends and the capital gains.C. the expected future dividends, capital gains and the discount rate.D. the expected future holding period and capital gains.E. None of the above.17. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the following statements is correct?A. The closing price on the previous day was $1.42 higher than today's closing price.B. A dealer will buy the stock at $22.87 and sell it at $26 a share.C. The stock increased in value between yesterday's close and today's close by $.0142.D. The earnings per share are equal to 1/26th of $22.87.E. The earnings per share have increased by $1.42 this year.18. A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD% chg 3.4, and net chg - .50. Which of the following statements are correct given this information?I. The stock price has increased by 3.4% during the current year.II. The closing price on the previous trading day was $32.60.III. The earnings per share are approximately $1.89.IV. The current yield is 17.5%.A. I and II onlyB. I and III onlyC. II and III onlyD. III and IV onlyE. I, III, and IV only19. The discount rate in equity valuation is composed entirely of:A. the dividends paid and the capital gains yield.B. the dividend yield and the growth rate.C. the dividends paid and the growth rate.D. the capital gains earned and the growth rate.E. the capital gains earned and the dividends paid.20. The net present value of a growth opportunity, NPVGO, can be defined as:A. the initial investment necessary for a new project.B. the net present value per share of an investment in a new project.C. a continual reinvestment of earnings when r < g.D. a single period investment when r > g.E. None of the above.21. Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?A. $21.60B. $22.46C. $27.44D. $34.62E. $36.0022. How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return?A. $19.23B. $20.00C. $20.40D. $20.80E. $21.6323. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by 5% annually. What is one share of this stock worth to you today if the appropriate discount rate is 14%?A. $7.14B. $7.50C. $11.11D. $11.67E. $12.2524. Majestic Homes' stock traditionally provides an 8% rate of return. The company just paid a $2 a year dividend which is expected to increase by 5% per year. If you are planning on buying 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase?A. $48.60B. $52.50C. $55.13D. $57.89E. $70.0025. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12% return on your equity investments?A. $10.00B. $13.33C. $16.67D. $18.88E. $20.0026. Martin's Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 15% rate of return. What is the maximum amount you are willing to pay to buy one share today?A. $10.00B. $13.33C. $16.67D. $18.88E. $20.0027. The common stock of Eddie's Engines, Inc. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?A. 7%B. 9%C. 11%D. 13%E. 15%28. The current yield on Alpha's common stock is 4.8%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?A. 10.04%B. 16.07%C. 21.88%D. 43.75%E. 45.94%29. Martha's Vineyard recently paid a $3.60 annual dividend on its common stock. This dividend increases at an average rate of 3.5% per year. The stock is currently selling for $62.10 a share. What is the market rate of return?A. 2.5%B. 3.5%C. 5.5%D. 6.0%E. 9.5%30. Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be $2.42 a share and that all future dividends are expected to increase by 2.5% annually. What is the market rate of return if this stock is currently selling for $22 a share?A. 9.5%B. 11.0%C. 12.5%D. 13.5%E. 15.0%31. Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The dividend yield must be:A. -4%.B. 4%.C. 8%.D. 12%.E. 20%.32. The common stock of Grady Co. had an 11.25% rate of return last year. The dividend amount was $.70 a share which equated to a dividend yield of 1.5%. What was the rate of price appreciation on the stock?A. 1.50%B. 8.00%C. 9.75%D. 11.25%E. 12.75%33. Weisbro and Sons' common stock sells for $21 a share and pays an annual dividend that increases by 5% annually. The market rate of return on this stock is 9%. What is the amount of the last dividend paid by Weisbro and Sons?A. $.77B. $.80C. $.84D. $.87E. $.8834. The common stock of Energizer's pays an annual dividend that is expected to increase by 10% annually. The stock commands a market rate of return of 12% and sells for $60.50 a share. What is the expected amount of the next dividend to be paid on Energizer's common stock?A. $.90B. $1.00C. $1.10D. $1.21E. $1.3335. The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3% annually. The last dividend it paid was $0.90 a share. What will the company's dividend be in six years?A. $0.90B. $0.93C. $1.04D. $1.07E. $1.1136. A stock pays a constant annual dividend and sells for $31.11 a share. If the dividend yield of this stock is 9%, what is the dividend amount?A. $1.40B. $1.80C. $2.20D. $2.40E. $2.8037. You have decided that you would like to own some shares of GH Corp. but need an expected 12% rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant $3.50 annual dividend per share?A. $26.04B. $29.17C. $32.67D. $34.29E. $36.5938. Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The company just paid its annual dividend of $1.20. What is the rate of growth of its dividend?A. 5.2%B. 5.5%C. 5.9%D. 6.0%E. 6.3%39. B&K Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last week, the company paid a dividend of $2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 8%?A. $71.16B. $74.01C. $76.97D. $80.05E. $83.2540. Wilbert's Clothing Stores just paid a $1.20 annual dividend. The company has a policy whereby the dividend increases by 2.5% annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another three years. If you desire a 10% rate of return, how much should you expect to pay for 100 shares when you can afford to buy this stock? Ignore trading costs.A. $1,640B. $1,681C. $1,723D. $1,766E. $1,81041. The Merriweather Co. just announced that it will pay a dividend next year of $1.60 and is establishing a policy whereby the dividend will increase by 3.5% annually thereafter. How much will one share be worth five years from now if the required rate of return is 12%?A. $21.60B. $22.36C. $23.14D. $23.95E. $24.7942. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What is the current value of one share if the required rate of return is 9.25%?A. $35.63B. $38.19C. $41.05D. $43.19E. $45.8143. The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per year. What is the market price of this stock if the market rate of return is 15%?A. $17.04B. $22.39C. $26.57D. $29.08E. $33.7144. Can't Hold Me Back, Inc. is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 7% rate of return?A. $7.20B. $14.48C. $18.88D. $21.78E. $25.0645. NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.25 a share. The following dividends will be $.40, $.60, and $.75 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.5% per year. How much are you willing to pay to buy one share of this stock if your desired rate of return is 12%?A. $1.45B. $5.80C. $7.25D. $9.06E. $10.5846. Now or Later, Inc. recently paid $1.10 as an annual dividend. Future dividends are projected at $1.14, $1.18, $1.22, and $1.25 over the next four years, respectively. After that, the dividend is expected to increase by 2% annually. What is one share of this stock worth to you if you require an 8% rate of return on similar investments?A. $15.62B. $19.57C. $21.21D. $23.33E. $25.9847. The Red Bud Co. just paid a dividend of $1.20 a share. The company announced today that it will continue to pay this constant dividend for the next 3 years after which time it will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7%?A. $2.94B. $3.15C. $3.23D. $3.44E. $3.6048. Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $.30 a share for two years commencing two years from today. After that time, the company plans on paying a constant $1 a share dividend indefinitely. Given a required return of 14%, what is the value of this stock?A. $4.82B. $5.25C. $5.39D. $5.46E. $5.5849. The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount becomes zero, the company will cease all dividends permanently. The required rate of return is 16%. What is one share of this stock worth?A. $3.76B. $4.08C. $4.87D. $5.13E. $5.3950. Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great success. The company paid its first annual dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that time, it is planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.5%?A. $9.41B. $11.40C. $11.46D. $11.93E. $12.4351. BC ‘n D just paid its annual dividend of $.60 a share. The projected dividends for the next five years are $.30, $.50, $.75, $1.00, and $1.20, respectively. After that time, the dividends will be held constant at $1.40. What is this stock worth today at a 6% discount rate?A. $20.48B. $20.60C. $21.02D. $21.28E. $21.4352. Beaksley, Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays a $2.00 a share dividend every other year. The last dividend was paid last year. Five years from now, the company is repurchasing all of the outstanding shares at a price of $50 a share. At an 8% rate of return, what is this stock worth today?A. $34.03B. $37.21C. $43.78D. $48.09E. $53.1853. Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?A. $4.50B. $7.71C. $10.80D. $15.60E. $27.0054. Nu-Tek, Inc. is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result it is going to reduce its annual dividend by 10% a year for the next three years. After that, it will maintain a constant dividend of $.70 a share. Last month, the company paid $1.80 per share. What is the value of this stock if the required rate of return is 13%?A. $6.79B. $7.22C. $8.22D. $8.87E. $9.0155. The Double Dip Co. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 5% a year for the next two years. After that, it will maintain a constant dividend of $1 a share. Two weeks ago, the company paid a dividend of $1.40 per share. What is this stock worth if you require a 9% rate of return?A. $10.86B. $11.11C. $11.64D. $12.98E. $14.2356. Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The required rate of return is 11%.A. $20.45B. $21.48C. $37.50D. $39.38E. $47.7057. What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly 1 year. The required rate of return is 12.5%.A. $9.52B. $10.88C. $12.24D. $17.00E. None of the above58. Mortgage Instruments Inc. is expected to pay dividends of $1.03 next year. The company just paid a dividend of $1. This growth rate is expected to continue. How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%.A. $20.00B. $21.50C. $34.75D. $50.00E. $51.5059. The Felix Corp. projects to pay a dividend of $.75 next year and then have it grow at 12% for the following 3 years before growing at 8% indefinitely thereafter. The equity has a required return of 10% in the market. The price of the stock should be ____.A. $9.38B. $17.05C. $41.67D. $59.80E. $62.3860. If a company paid a dividend of $0.40 last month and it is expected to grow at 7% for the next 6 years and then grow at 4% thereafter, the dividend expected in year 8 is ___.A. $0.63B. $0.65C. $0.68D. $0.69E. $0.7461. The Lory Company had net earnings of $127,000 this past year. Dividends of $38,100 were paid. The company's equity was $1,587,500. If Lory has 100,000 shares outstanding with a current market price of $11.625 per share, and the growth rate is 5.6%, what is the required rate of return?A. 4.2%B. 6%C. 9%D. 14%E. None of the above62. Doctors-On-Call, a newly formed medical group, just paid a dividend of $.50. The company's dividend is expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter. What is the value of the stock if the appropriate discount rate is 12%?A. $8.08B. $11.17C. $14.22D. $17.32E. $30.9063. A stock you are interested in paid a dividend of $1 last week. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.A. $17.20B. $17.90C. $18.20D. $19.40E. $19.7564. A stock you are interested in paid a dividend of $1 last month. The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.A. $15.38B. $20.50C. $21.04D. $22.27E. $26.1465. Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an estimated price of $120. The appropriate discount rate is 9%.A. $114.60B. $119.43C. $124.20D. $129.50E. $138.75Essay Questions66. What are the components of the required rate of return on a share of stock? Briefly explain each component.67. Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond, and explain why.68. A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.Chapter 09 How to Value Stocks Answer KeyMultiple Choice Questions1. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.A. zero growthB. dividend growthC. capital pricingD. earnings capitalizationE. differential growthDifficulty level: EasyTopic: DIVIDEND GROWTH MODELType: DEFINITIONS2. Next year's annual dividend divided by the current stock price is called the:A. yield to maturity.B. total yield.C. dividend yield.D. capital gains yield.E. earnings yield.Difficulty level: EasyTopic: DIVIDEND YIELDType: DEFINITIONS3. The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.A. currentB. totalC. dividendD. capital gainsE. earningsDifficulty level: EasyTopic: CAPITAL GAINS YIELDType: DEFINITIONS4. A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.A. dual classB. cumulativeC. deferredD. preferredE. commonDifficulty level: EasyTopic: COMMON STOCKType: DEFINITIONS5. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:A. retained earnings.B. net income.C. dividends.D. redistributions.E. infused equity.Difficulty level: EasyTopic: DIVIDENDSType: DEFINITIONS6. The constant dividend growth model is:A. generally used in practice because most stocks have a constant growth rate.B. generally used in practice because the historical growth rate of most stocks is constant.C. generally not used in practice because most stocks grow at a non constant rate.D. generally not used in practice because the constant growth rate is usually higher than the required rate of return.E. based on the assumption Dow 30 represents a good estimate of the market index.Difficulty level: MediumTopic: CONSTANT DIVIDEND GROWTH MODELType: CONCEPTS7. The constant dividend growth model:I. assumes that dividends increase at a constant rate forever.II. can be used to compute a stock price at any point of time.III. states that the market price of a stock is only affected by the amount of the dividend. IV. considers capital gains but ignores the dividend yield.A. I onlyB. II onlyC. III and IV onlyD. I and II onlyE. I, II, and III onlyDifficulty level: MediumTopic: CONSTANT DIVIDEND GROWTH MODELType: CONCEPTS8. The underlying assumption of the dividend growth model is that a stock is worth:A. the same amount to every investor regardless of their desired rate of return.B. the present value of the future income which the stock generates.C. an amount computed as the next annual dividend divided by the market rate of return.D. the same amount as any other stock that pays the same current dividend and has the same required rate of return.E. an amount computed as the next annual dividend divided by the required rate of return. Difficulty level: MediumTopic: DIVIDEND GROWTH MODELType: CONCEPTS。
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Chapter 23 Options and Corporate Finance: Extensions and A p p l i c a t i o n s A n s w e r K e yMultiple Choice Questions1.The option to abandon is:A.a real option.ually of little value because of the cost associated with abandonment.C.irrelevant in capital budgeting analysis.D.nearly always less relevant the option to expand.E.All of the above.Difficulty level: MediumTopic: OPTION TO ABANDONType: DEFINITIONS2.An example of a special option is:A.an executive stock option.B.the embedded option in a start-up company.C.the option in simple business contracts.D.the option to shut down and reopen a project.E.All of the above.Difficulty level: MediumTopic: SPECIAL OPTIONType: DEFINITIONS3.Executives can not exercise their options for a fixed period of time. This is the:A.investing period.B.freeze-out period.C.valuation period.D.guaranteed growth period.E.strike period.Difficulty level: MediumTopic: FREEZE-OUT PERIODType: DEFINITIONS4.The NPV approach must be:A.augmented by added analysis if there are a few embedded options.B.augmented by added analysis if a decision has significant embedded options.C.jettisoned if there are any embedded options.D puted carefully to identify the options.E.None of the above.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS5.Options are granted to top corporate executives because:A.executives will make better business decisions in line with benefiting the shareholders.B.executive pay is at risk and linked to firm performance.C.options are tax-efficient and taxed only when they are exercised.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS6.The call option on a dividend paying stock compared to a non-dividend paying stock is:A.more valuable because of the extra dividend payment.B.equal in value because cash dividends are paid on stock only.C.less valuable because cash dividends are paid on stock only.D.less valuable if the dividend paying stock is in-the-money while thenon-dividend paying stock if out-of-the-money.E.None of the above.Difficulty level: ChallengeTopic: CALL OPTION ON DIVIDEND PAYING STOCKType: CONCEPTS7.The value of the options awarded executives is much less than face value to the executives because:A.the value to the executive depends on the stock price being greater than the exercise price.B.the options must be held beyond the freeze-out period.C.a highly undiversified portfolio can have a large drop in value with high variance stocks.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS8.By rewarding executives with large option positions, corporations:A.cause the executives to hold highly undiversified portfolios.B.put the firm in a risky position to pay off the options.C.cause the value of the stock to fall because the options are theft.D.are really valueless because most options are never exercised.E.None of the above.Difficulty level: ChallengeTopic: EXECUTIVE OPTIONSType: CONCEPTS9.Investing in a negative NPV project today is a feasible choice if:A.there are future option alternatives.B.investing is sequentially limited.C.the discount rate is low.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: NEGATIVE NPV PROJECTS AND REAL OPTIONSType: CONCEPTS10.The opportunity to defer investing to a later date may have value because:A.the cost of capital may decline in the near future.B.certainty may be reduced in the future.C.investment costs fluctuate in time.D.All of the above.E.None of the above.Difficulty level: EasyTopic: OPTION TO DEFERType: CONCEPTS11.Rejecting an investment today forever may not be a good choice because:A.the size of the firm will decline.B.there are always errors in the estimation of NPVs.C.the option value is negative.D.the company's foregoing the future rights or option to the investment.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS12.A financial manager who does not follow the general constraints of the NPV rule may:A.accept a negative NPV project for fear of losing an investment opportunity.B.accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.C.not consider all options available in a capital budgeting decision.D.not take a positive NPV project even if the NPV is adequate reward to forego the option.E.All of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS13.The volatility of interest rates can affect the value of the project by:A.increasing the value as volatility increases.B.increasing the value as volatility decreases.C.decreasing the value as volatility increases.D.interest rate volatility does not affect value.E.None of the above.Difficulty level: MediumTopic: INTEREST RATE VOLATILITYType: CONCEPTS14.Which of the following statements is trueA.The Black Scholes model is the simplest to use and best used for complex situations.B.The binomial model does not handle options with dividend payments prior to expiration date.C.The Black Scholes model adequately handles the valuation of an American put.D.The binomal model is better for complex situations and is the simplest tool to use.E.The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool.Difficulty level: MediumTopic: OPTION PRICING TOOLSType: CONCEPTS15.If a project has optionality:A.the shorter the available life of the project the less valuable the project is.B.the longer the available life of the project the less valuable the project is.C.the shorter the available life of the project the more valuable the project is.D.available project life does not change optionality.E.None of the above.Difficulty level: EasyTopic: OPTIONALITYType: CONCEPTS16.The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable if:A.there is a constant variability.B.any new information impacting prices is similar period to period.C.interest or discount rates are constant.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: VARIABILITY AND INFORMATIONType: CONCEPTS17.The most correct method to determine the current value of future payoffs would be to:A.take the discounted expected value at the risk-free rate.B.take the expected value using the probabilities.C.take the discounted expected value using the risk-neutral probabilities and the risk free rate.D.sum the payoffs discounted at the risk free rate.E.None of the above.Difficulty level: MediumTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS18.The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:A.given by the probability of each state occurring.B.given by the value of the underlying asset under good news and the risk free rate.C.given by the value of the underlying asset under good news and bad news.D.given by the value of the underlying asset under good news, bad news, and the risk free rate.E.None of the above.Difficulty level: ChallengeTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS19.A branching tree for the binomial model:A.should capture all possible futures paths for the asset.B.has a move down followed by a move up on a subsequent branch to end at the same value as the reverse path.C.has a move down followed by a move up on a subsequent branch to end at a lower value than a move up then a move down.D.Both A and C.E.Both A and B.Difficulty level: ChallengeTopic: BINOMIAL MODELType: CONCEPTS20.Increasing the number of intervals in the binomial model causes the price shift parameters to change. New estimates are related to:A.the standard deviation of the underlying asset.B.the up state multiplier equals the standard deviation divided by root n.C.the number of intervals in a year.D.All of the above.E.None of the above.Difficulty level: MediumTopic: BINOMIAL MODELType: CONCEPTS21.Which of the following is not part of the Black Scholes option pricing model A.Standard deviationB.Time to maturityC.Exercise priceD.Par value of the company's stockE.Interest rateDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS22.What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38A.; .8961B..0317;C..0317; .9683D..2193; .7807E.None of the aboveDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS23.On the notion of embedded options, which of the following is/are trueA.If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation.B.There are at least two possible outcomes for virtually every business idea.C.Virtually every business has both the option to abandon and the option to expand.D.All of the above.E.Both B and C.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS24.A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value. This value can be primarily attributed to:A.the potential sale of the company.B.the low exercise price held by the shareholders.C.the option to open the facility when prices rise dramatically.D.All of the above.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTSNote: Correct answers to later questions are dependent on correct answers to earlier questions.Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 4%.25.What is d1A..1842B..4102C..4583D..4909E..5412= ln22/22 + .04 + .3/ .073d1= .225/.4583 = .4909d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS26.What is d2A..0121B..0252C..0326D..0452E..0525d 2 = d1- 2t = .4909 - .073 = .4909 - .4583 = .0326Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS27.What is e-rtA..6087B..7087C..7952D..8476E..88693 = .8869Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS28.Calculate Nd.1A..5054B..6508C..6882D..7047E..8096= .50 + .1882 = .6882 Nd1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS29.Calculate Nd.2A..5130B..5578C..6085D..7085E..7142= .50 + .0130 = .5130Nd2Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS30.What is the value of a call optionA.$B.$C.$D.$E.$。
【实用资料】罗斯公司理财题库全集.doc
Chapter 13 Risk, Cost of Capital, and Capital Budgeting Answer KeyMultiple Choice Questions1. The weighted average of the firm's costs of equity, preferred stock, and after tax debt is the:A. reward to risk ratio for the firm.B. expected capital gains yield for the stock.C. expected capital gains yield for the firm.D. portfolio beta for the firm.E. weighted average cost of capital (WACC).Difficulty level: EasyTopic: WACCType: DEFINITIONS2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:A. return on the stock minus the risk-free rate.B. difference between the return on the market and the risk-free rate.C. beta times the market risk premium.D. beta times the risk-free rate.E. market rate of return.Difficulty level: EasyTopic: CAPMType: DEFINITIONS3. The best fit line of a pairwise plot of the returns of the security against the market index returns is called the:A. Security Market Line.B. Capital Market Line.C. characteristic line.D. risk line.E. None of the above.Difficulty level: MediumTopic: CHARACTERISTIC LINEType: DEFINITIONS4. The use of debt is called:A. operating leverage.B. production leverage.C. financial leverage.D. total asset turnover risk.E. business risk.Difficulty level: MediumTopic: USE OF DEBTType: DEFINITIONS5. The weighted average cost of capital for a firm is the:A. discount rate which the firm should apply to all of the projects it undertakes.B. overall rate which the firm must earn on its existing assets to maintain the value of its stock.C. rate the firm should expect to pay on its next bond issue.D. maximum rate which the firm should require on any projects it undertakes.E. rate of return that the firm's preferred stockholders should expect to earn over the long term. Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: DEFINITIONS6. The WACC is used to _______ the expected cash flows when the firm has ____________.A. discount; debt and equity in the capital structureB. discount; short term financing on the balance sheetC. increase; debt and equity in the capital structureD. decrease; short term financing on the balance sheetE. None of the above.Difficulty level: MediumTopic: WACCType: CONCEPTS7. Using the CAPM to calculate the cost of capital for a risky project assumes that:A. using the firm's beta is the same measure of risk as the project.B. the firm is all-equity financed.C. the financial risk is equal to business risk.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: CAPMType: CONCEPTS8. The use of WACC to select investments is acceptable when the:A. correlation of all new projects are equal.B. NPV is positive when discounted by the WACC.C. risk of the projects are equal to the risk of the firm.D. firm is well diversified and the unsystematic risk is negligible.E. None of the above.Difficulty level: EasyTopic: WACCType: CONCEPTS9. If the risk of an investment project is different than the firm's risk then:A. you must adjust the discount rate for the project based on the firm's risk.B. you must adjust the discount rate for the project based on the project risk.C. you must exercise risk aversion and use the market rate.D. an average rate across prior projects is acceptable because estimates contain errors.E. one must have the actual data to determine any differences in the calculations. Difficulty level: EasyTopic: DISCOUNT RATEType: CONCEPTS10. If the project beta and IRR coordinates plot above the SML the project should be:A. accepted.B. rejected.C. It is impossible to tell.D. It will depend on the NPV.E. None of the above.Difficulty level: MediumTopic: SECURITY MARKET LINEType: CONCEPTS11. The beta of a security provides an:A. estimate of the market risk premium.B. estimate of the slope of the Capital Market Line.C. estimate of the slope of the Security Market Line.D. estimate of the systematic risk of the security.E. None of the above.Difficulty level: EasyTopic: BETAType: CONCEPTS12. Regression analysis can be used to estimate:A. beta.B. the risk-free rate.C. standard deviation.D. variance.E. expected return.Difficulty level: EasyTopic: BETA ESTIMATIONType: CONCEPTS13. Beta measures depend highly on the:A. direction of the market variance.B. overall cycle of the market.C. variance of the market and asset, but not their co-movement.D. covariance of the security with the market and how they are correlated.E. All of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.A. variance; covarianceB. covariance; varianceC. standard deviation; varianceD. expected return; varianceE. expected return; covarianceDifficulty level: MediumTopic: BETAType: CONCEPTS15. The slope of the characteristic line is the estimated:A. intercept.B. beta.C. unsystematic risk.D. market variance.E. market risk premium.Difficulty level: MediumTopic: BETA AND CHARACTERISTIC LINEType: CONCEPTS16. Companies that have highly cyclical sales will have a:A. low beta if sales are highly dependent on the market cycle.B. high beta if sales are highly dependent on the market cycle.C. high beta if sales are independent of the market cycle.D. All of the above.E. None of the above.Difficulty level: MediumTopic: CYCLICAL BUSINESS AND BETAType: CONCEPTS17. Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on:A. how small the estimation errors are of all betas across industries.B. how similar the firm's operations are to the operations of all other firms in the industry.C. whether the company is a leader or follower.D. the size of the company's public float.E. None of the above.Difficulty level: MediumTopic: INDUSTRY OR FIRM BETAType: CONCEPTS18. Beta is useful in the calculation of the:A. company's variance.B. company's discount rate.C. company's standard deviation.D. unsystematic risk.E. company's market rate.Difficulty level: MediumTopic: BETAType: CONCEPTS19. For a multi-product firm, if a project's beta is different from that of the overall firm, then the:A. CAPM can no longer be used.B. project should be discounted using the overall firm's beta.C. project should be discounted at a rate commensurate with its own beta.D. project should be discounted at the market rate.E. project should be discounted at the T-bill rate.Difficulty level: MediumTopic: PROJECT AND FIRM BETAType: CONCEPTS20. The problem of using the overall firm's beta in discounting projects of different risk is the:A. firm would accept too many high-risk projects.B. firm would reject too many low risk projects.C. firm would reject too many high-risk projects.D. firm would accept too many low risk projects.E. Both A and B.Difficulty level: MediumTopic: FIRM'S BETAType: CONCEPTS21. The asset beta of a levered firm is generally:A. equal to the equity beta.B. different from the equity beta.C. different from the debt beta.D. the simple average of the equity beta and debt beta.E. Both B and C.Difficulty level: MediumTopic: ASSET BETAType: CONCEPTS22. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.A. equal toB. significantly lessC. slightly lessD. greaterE. None of the above.Difficulty level: MediumTopic: LEVERED VS. UNLEVERED BETAType: CONCEPTS23. The beta of a firm is determined by which of the following firm characteristics?A. Cycles in revenuesB. Operating leverageC. Financial leverageD. All of the above.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS24. The beta of a firm is more likely to be high under what two conditions?A. High cyclical business activity and low operating leverageB. High cyclical business activity and high operating leverageC. Low cyclical business activity and low financial leverageD. Low cyclical business activity and low operating leverageE. None of the above.Difficulty level: MediumTopic: FACTORS AFFECTING BETAType: CONCEPTS25. A firm with cyclical earnings is characterized by:A. revenue patterns that vary with the business cycle.B. high levels of debt in its capital structure.C. high fixed costs.D. high price per unit.E. low contribution margins.Difficulty level: MediumTopic: CYCLICAL EARNINGSType: CONCEPTS26. A firm with high operating leverage has:A. low fixed costs in its production process.B. high variable costs in its production process.C. high fixed costs in its production process.D. high price per unit.E. low price per unit.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS27. If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:A. a smaller change in EBIT for the firm versus the other firms.B. no effect in any way on the firms as volume does not effect fixed costs.C. a decreasing effect on the cyclical nature of the business.D. a larger change in EBIT for the firm versus the other firms.E. None of the above.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS28. A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________.A. low fixed cost of production; low fixed financial costsB. high variable cost of production; high variable financial costsC. high fixed costs of production; high fixed financial costsD. low costs of production; high fixed financial costsE. high fixed costs of production; low variable financial costsDifficulty level: MediumTopic: OPERATING AND FINANCIAL LEVERAGEType: CONCEPTS29. Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:A. low betas.B. high betas.C. zero betas.D. negative betas.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS30. An industry is likely to have a low beta if the:A. stream of revenues is stable and less volatile than the market.B. economy is in a recession.C. market for its goods is unaffected by the market cycle.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS31. For the levered firm the equity beta is __________ the asset beta.A. greater thanB. less thanC. equal toD. sometimes greater than and sometimes less thanE. None of the above.Difficulty level: MediumTopic: ASSET AND EQUITY BETASType: CONCEPTS32. All else equal, a more liquid stock will have a lower ________.A. betaB. market premiumC. cost of capitalD. Both A and B.E. Both A and C.Difficulty level: ChallengeTopic: LIQUIDITYType: CONCEPTS33. Two stock market based costs of liquidity that affects the cost of capital are the:A. bid-ask spread and the specialist spread.B. market impact cost and the brokerage costs.C. investor opportunity cost and the brokerage costs.D. bid-ask spread and the market impact costs.E. None of the above.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS34. When a specialist is caught in the middle of a trade between informed and uniformed traders, which effectively eliminates the spread or causes a loss, is subject to:A. market impact costs.B. adverse selection.C. broker's quotation bias.D. increasing the number of uninformed traders.E. None of the above.Difficulty level: ChallengeTopic: ADVERSE SELECTIONType: CONCEPTS35. All else equal, new shareholders will ____ the capital gains of existing shareholders.A. diluteB. hold constantC. increaseD. All of the aboveE. It is impossible to tell.Difficulty level: MediumTopic: CAPITAL GAINSType: CONCEPTS36. The following are methods to estimate the market risk premium:A. use historical data to estimate future risk premium.B. use the dividend discount model to estimate risk premium.C. use the bond valuation model to estimate growth in bond prices with different costs of capital.D. A and B.E. A and C.Difficulty level: MediumTopic: MARKET RISK PREMIUMType: CONCEPTS37. Beta is the slope of the:A. efficient frontier.B. market portfolio.C. security market line.D. characteristic line.E. None of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS38. Two stocks that have the same beta ____ have the same correlation because _______:A. may; because correlation measures the sensitivity of the S&P to the market portfolio.B. will; because correlation measures the tightness of fit around the regression line.C. may not; because correlation measures the tightness of fit around the regression line.D. may not; because correlation measures the sensitivity to change.E. None of the above.Difficulty level: MediumTopic: BETA AND CORRELATIONType: CONCEPTS39. When using the cost of debt, the relevant number is the:A. pre-tax cost of debt since most corporations pay taxes at the same tax rate.B. pre-tax cost of debt since it is the actual rate the firm is paying bondholders.C. post-tax cost of debt since dividends are tax deductible.D. post-tax cost of debt since interest is tax deductible.E. None of the above.Difficulty level: MediumTopic: COST OF DEBTType: CONCEPTS40. Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital?A. 7.10%B. 7.39%C. 10.38%D. 10.65%E. 11.37%R e = .04 + (1.1 ⨯ .08) = .128Debt: 80,000 ⨯ $1,000 = $80mCommon: 4m ⨯ $40 = $160mTotal = $80m + $160m = $240mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS41. Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop?A. 6.14%B. 6.54%C. 8.60%D. 9.14%E. 9.45%Debt: $500,000 ⨯ 1.02 = $.51mPreferred: 40,000 ⨯ $34 = $1.36mCommon: 104,000 ⨯ $20 = $2.08mTotal = $.51m + $1.36m + $2.08m = $3.95mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS42. Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9%. The firm has an after-tax cost of debt of 5% and a cost of equity of 11%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?A. .33B. .40C. .50D. .60E. .67.09 = [W e⨯ .11] + [(1 - W e) ⨯ .05) = .11W e + .05 - .05W e; .04 = .06W e; W e = 66.67%; W d = 1 - W e = 100% - 66.67% = 33.33%; Debt - equity ratio = 33.33% ÷ 66.67% = .50Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS43. Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?A. 5.3%B. 5.8%C. 6.3%D. 6.9%E. 7.2%Debt: 6,000 ⨯ $1,000 ⨯ .99 = $5.94mCommon: 210,000 ⨯ $36 = $7.56mTotal = $5.94m + $7.56m = $13.50mR e = [($1.593 ⨯ 1.04) ÷ $36] + .04 = .08602Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS44. The Consolidated Transfer Co. is an all-equity financed firm. The beta is .75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Consolidated?A. 7%B. 8%C. 9%D. 10%E. 13%.04 + 0.75(.08) = .10 = 10%Difficulty level: EasyTopic: CAPMType: PROBLEMS45. Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?A. 10.4%B. 10.8%C. 12.8%D. 14.4%E. None of the above.Rs = Rf + β(Rm - Rf) = .02 + 1.2(.09 - .02) = .104 = 10.4%Difficulty level: MediumTopic: CAPMType: PROBLEMS46. The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is ___.A. 0.48B. 0.68C. 1.25D. 1.68E. Impossible to calculate with information given.Rs = Rf + β (Rm - Rf); .084 = .05 + β (.10 - .05); β = .68Difficulty level: MediumTopic: EQUITY BETAType: PROBLEMS47. Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, the expected return on Simmons' common stock is:A. 4.0%.B. 5.0%.C. 5.6%.D. 10.6%.E. 11.4%.Rs = Rf + β(Rm - Rf) = .05 + 1.6(.04) = .114 = 11.4%Difficulty level: EasyTopic: CAPMType: PROBLEMS48. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is ______.A. 1.00B. 1.17C. 1.20D. 2.50E. It is impossible to calculate with the information given.Rs = Rf + β(Rm - Rf); .12 = .05 + β(.06); β = .07/.06 = 1.17Difficulty level: MediumTopic: CALCULATING BETAType: PROBLEMS49. Slippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is its asset beta?A. 0.40B. 0.72C. 1.20D. 1.80E. None of the aboveβA = (E/(D + E.) βE = (1/3)(1.2) = .40Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS50. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta?A. 0.70B. 0.72C. 0.96D. 1.04E. 1.05.8(.6/1.6) + 1.2(1/1.6) = 1.05Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS51. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is:A. 8.65%B. 9%C. 9.47%D. 10.5%E. 13%WACC = .09(1 - .34)(.5) + .13(.5) = .0297 + .065 = .0947 = 9.47%Difficulty level: EasyTopic: WACCType: PROBLEMSEssay Questions。
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Chapter 21Leasing Multiple Choice Questions1.In a lease arrangement, the owner of the asset is:A.the lesser.B.the lessee.C.the lessor.D.the leaser.E.None of the above.2.In a lease arrangement, the user of the asset is:A.the lesser.B.the lessee.C.the lessor.D.the leaser.E.None of the above.3.Which of the following would not be a characteristic of a financial lease?A.They are not usually fully amortized.B.They usually do not have maintenance necessary for the leased assets.C.They usually do not include a cancellation option.D.The lessee usually has the right to renew the lease at expiration.E.All of the above are characteristics of financial leases.4.An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.A.leveraged; directB.sales and leaseback; sales-typeC.capital; sales-typeD.direct; sales-typeE.None of the above5.Which of the following is not a financial lease?A.A leveraged leaseB.An operating leaseC.A sale-and-leasebackD.Both A and B.E.None of the above.6.If the lessor borrows much of the purchase price of a leased asset, the lease is called:A.a leveraged lease.B.a sale-and-leaseback.C.a capital lease.D.a nonrecourse lease.E.None of the above.7.An operating lease's primary characteristics are:A.fully amortized, lessee maintains equipment and there is no cancellation clause.B.not fully amortized, lessor maintains equipment and there is a cancellation clause.C.fully amortized, lessor maintains equipment and there is a cancellation clause.D.not fully amortized, lessor maintains equipment and there is not cancellation clause.E.fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market value.8.If a lease is for 35 years, it is regarded as a:A.financial lease.B.operating lease.C.capital lease.D.conditional sale.E.sale and leaseback.9.The city of Oakland sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:A.an operating lease.B.a short-term lease.C.a sale and leaseback.D.a fully amortized lease.E.None of the above.10.A financial lease has the following as its primary characteristics:A.is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause.B.is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause.C.is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause.D.is not fully amortized, lessor maintains equipment and there is a renewal clause.E.is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clause.11.An advantage of leasing is that the lessor does not own the asset and can cancel:A.only financial leases.B.only operating leases.C.only capital leases.D.any kind of leases anytime.E.None of the above.12.A leveraged lease typically involves a non-recourse loan in which:A.the lessee's payments go directly to the lender in case of default.B.the lessor is not obligated in case of default.C.the third party lenders have a first lien on the assets.D.All of the above.E.None of the above.13.For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?A.The lessee can purchase the asset below fair market value at the end of the lease.B.The lease transfers ownership of the asset to the lessee by the end of the lease.C.The lease term is more than 75% of the asset's economic life.D.The present value of the lease payments is more than 90% of the asset's market value at lease inception.E.All of the above would lead to the lease being considered a capital lease.14.Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?A.Capital leases do not have to be put on the balance sheet; only financial leases do.B.Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement.C.Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000.D.Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement.E.None of the above.15.Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:A.capital leases appear financially stronger than firms that used debt to purchase the asset.B.operating leases appear financially stronger than firms that used debt to purchase the asset.C.leases of any type appear financially stronger than firms that used debt to purchase the asset.D.All of the above.E.None of the above.16.Which of the following is not an implication of FASB 13, Accounting for Leases?A.FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet.B.FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet.C.FASB 13 allows for off-balance-sheet financing for operating leases.D.All of the above.E.None of the above.17.The reason the IRS is most concerned about lease contracts is:A.firms that lease generally pay no taxes.B.that leasing usually leads to bankruptcy.C.that leases can be set up solely to avoid taxes.D.because leasing leads to off-balance-sheet-financing.E.All of the above.18.A lease with high payments early in its life which then decline to termination would:A.provide greater cash flow to the lessee in the beginning years.B.be evidence of tax avoidance and not acceptable to the IRS.C.be qualified as a capital lease under FASB 13.D.provide a lower residual value and thus ensure a bargain-purchase price option.E.All of the above.19.In valuing the lease versus purchase option, the relevant cash flows are the:A.tax shield from depreciation.B.investment outlay for the equipment.C.a decrease in the firm's operating costs that are not affected by leasing.D.All of the above are relevant.E.None of the above are relevant.20.The appropriate discount rate for valuing a financial lease is:A.the firm's after-tax weighted average cost of capital.B.the after-tax required return on assets of risks similar to the leased asset.C.the after-tax cost of secured borrowing.D.Either A or B.E.All of the above.21.The WACC is not used in the lease versus purchase decision because:A.the WACC was used in the decision to acquire the asset, this is only a financing decision.B.the WACC is used only when a lease alone is considered and not a lease versus purchase.C.the WACC does not include the lease cost of capital and therefore should not be used.D.tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.E.when a bank arranges a lease they do not consider the lessee's cost of capital.22.Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because:A.lenders are concerned about the firm's total liabilities and related cash flow.B.debt displacement occurs with leasing.C.less future debt can be raised for a growing firm when a lease is used.D.All of the above.E.None of the above.23.______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose.A.Early balloon paymentste balloon paymentsC.Capitalizing a leaseD.Transfer of lease payments to a second ownerE.None of the above24.Debt displacement is associated with leases because:A.all assets not purchased with equity use debt financing.B.debt is always a cheaper source of financing and preferred to equity financing.C.FASB 13 and the IRS mandate debt displacement.D.lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.E.None of the above.25.A lease is likely to be most beneficial to both parties when:A.the lessor's tax rate is lower than the lessee's.B.the lessor's tax rate is higher than the lessee's.C.the lessor's tax rate is equal to the lessee's.D.a lease cannot be beneficial to both parties.E.a lease always has zero NPV, so both parties always break even.26.The price or lease payment that the lessee sets as their bound is known as:A.the present value of the tax shields.B.the reservation payment, L MIN.C.the present value of operating savings.D.the reservation payment, L MAX.E.None of the above.27.Which of the following is probably not a good reason for leasing instead of buying?A.Taxes may be reduced by leasing.B.Leasing may reduce transactions costs.C.Leasing may provide a beneficial reduction of uncertainty.D.All of the above are good reasons.E.All of the above are not good reasons.28.Which of the following is probably a good reason for leasing instead of buying?A.Leasing provides 100% financing.B.Leasing is not considered a form of debt financing.C.Leasing may increase EPS relative to buying.D.All of the above are good reasons.E.None of the above is a good reason.29.Some assets are leased more than others because:A.the value of the asset under a lease is not highly affected by term of use or maintenance decisions.B.a lease may be used to fool clients into "buying" high priced assets above market value.C.leasing allows sellers to attract clients with low prices as the basis for setting the contract.D.Both A and B.E.Both A and C.30.To meet IRS guidelines for leasing, the lease should:A.limit the lessee's right to issue debt or pay dividends while the lease is operative.B.not limit the lessee's right to issue debt or pay dividends while the lease is operative.C.pay a very high return to the lessor.D.transfer ownership of the asset at the end of the lease at below fair market value.E.be over 30 years.Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%.31.What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-9?A.$-255B.$-955C.$-1,295D.$-1,850E.None of the above32.What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?A.$-4,865B.$-700C.$6,950D.$7,650E.None of the above33.What is the NPV of the lease relative to the purchase?A.$-1,039.78B.$339.78C.$360.22D.$6,610.22E.None of the above34.What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?A.$-605B.$-955C.$-1,455D.$-1,305E.None of the above35.This lease would be classified as a(n):A.operating lease because the asset will be obsolete.B.operating lease because there is no amortization.C.leveraged lease because it is being financed.D.capital lease because the lease life is greater than 75% of the economic life.E.sale and leaseback because the company gets full use of the asset.Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%.36.What is the appropriate discount rate for valuing the lease?A.2.72%B.5.28%C.8.00%D.12.12%E.None of the above.37.What is the after-tax cash flow from leasing in year 0?A.$300,000B.$495,000C.$852,000D.$948,000E.None of the above38.What is the after-tax cash flow in years 1 through 5?A.$-126,600B.$-198,000C.$-269,400D.$-287,250E.None of the above39.What is the NPV of the lease?A.$-111,690B.$-295,040C.$-305,388D.$-309,690E.None of the above40.What is the maximum lease payment that you would be willing to make?A.$170,655B.$175,000C.$187,842D.$210,307E.None of the above41.What is the minimum lease payment that the lessor would be willing to accept?A.$161,000B.$176,995C.$217,645D.$237,083E.None of the aboveYour firm is considering leasing a new laser light. The lease lasts for 3 years. The lease calls for 4 payments of $10,000 per year with the first payment occurring immediately. The computer would cost $45,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 10%. The corporate tax rate is 35%.42.What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3?A.$-32,775B.$-11,750C.$-1,750D.$-1,850E.None of the above43.What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?A.$-35,000B.$-38,500C.$35,000D.$38,500E.None of the above44.What is the NPV of the lease relative to the purchase?A.$-6,500B.$7,380C.$4,678D.$12,400E.None of the above45.What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)?A.$-11,750B.$11,750C.$12,400D.$-12,400E.None of the above46.This lease would be classified as a(n):A.operating lease because the asset will be obsolete.B.operating lease because there is no amortization.C.leveraged lease because it is being financed.D.capital lease because the lease life is greater than 75% of the economic life.E.sale and leaseback because the company gets full use of the asset.Essay Questions47.Sardinas Sardines has assets valued at $10 million and equity of $10 million. The firm recently leased new equipment worth $1 million. Present the balance sheet under two conditions; the lease is judged to be an operating lease, and the lease is judged to be a capital lease.48.The Blank Button Company is considering the purchase of a new machine for $30,000. The machine is expected to save the firm $12,500 per year in operating costs over a 5 year period, and can be depreciated on a straight-line basis to a zero salvage value over its life. Alternatively, the firm can lease the machine for $6,500 per year for 5 years, with the first payment due in 1 year. The firm's tax rate is 34%, and its cost of debt is 10%. Calculate the NPV of the lease versus the purchase decision. Calculate the reservation payment of the lessee.49.The Plastic Iron Company has decided to acquire a new electronic milling machine. Plastic Iron can purchase the machine for $87,000 which has an expected life of 8 years and will be depreciated using 7 class MACRS ratesof .1428, .2449, .1749, .125, .0892, .0892, .0892 and any remainder in year 8. Miller Leasing has offered to lease the machine to Plastic Iron for $14,000 a year for 8 years. Plastic Iron has an 18.64% cost of equity, 12% cost of debt, a 1:1 D/E ratio and faces a 34% marginal tax rate. Should they lease or buy? Show all work.50.What are some of the advantages and disadvantages of leasing?Chapter 21 Leasing Answer KeyMultiple Choice Questions1.In a lease arrangement, the owner of the asset is:A.the lesser.B.the lessee.C.the lessor.D.the leaser.E.None of the above.Difficulty level: EasyTopic: LESSORType: DEFINITIONS2.In a lease arrangement, the user of the asset is:A.the lesser.B.the lessee.C.the lessor.D.the leaser.E.None of the above.Difficulty level: EasyTopic: LESSEEType: DEFINITIONS3.Which of the following would not be a characteristic of a financial lease?A.They are not usually fully amortized.B.They usually do not have maintenance necessary for the leased assets.C.They usually do not include a cancellation option.D.The lessee usually has the right to renew the lease at expiration.E.All of the above are characteristics of financial leases.Difficulty level: MediumTopic: FINANCIAL LEASEType: DEFINITIONS4.An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.A.leveraged; directB.sales and leaseback; sales-typeC.capital; sales-typeD.direct; sales-typeE.None of the aboveDifficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS5.Which of the following is not a financial lease?A.A leveraged leaseB.An operating leaseC.A sale-and-leasebackD.Both A and B.E.None of the above.Difficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS6.If the lessor borrows much of the purchase price of a leased asset, the lease is called:A.a leveraged lease.B.a sale-and-leaseback.C.a capital lease.D.a nonrecourse lease.E.None of the above.Difficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS7.An operating lease's primary characteristics are:A.fully amortized, lessee maintains equipment and there is no cancellation clause.B.not fully amortized, lessor maintains equipment and there is a cancellation clause.C.fully amortized, lessor maintains equipment and there is a cancellation clause.D.not fully amortized, lessor maintains equipment and there is not cancellation clause.E.fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market value.Difficulty level: MediumTopic: OPERATING LEASEType: DEFINITIONS8.If a lease is for 35 years, it is regarded as a:A.financial lease.B.operating lease.C.capital lease.D.conditional sale.E.sale and leaseback.Difficulty level: MediumTopic: TYPES OF LEASESType: DEFINITIONS9.The city of Oakland sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:A.an operating lease.B.a short-term lease.C.a sale and leaseback.D.a fully amortized lease.E.None of the above.Difficulty level: EasyTopic: TYPES OF LEASEType: CONCEPTS10.A financial lease has the following as its primary characteristics:A.is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause.B.is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause.C.is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause.D.is not fully amortized, lessor maintains equipment and there is a renewal clause.E.is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clause.Difficulty level: EasyTopic: FINANCIAL LEASEType: CONCEPTS11.An advantage of leasing is that the lessor does not own the asset and can cancel:A.only financial leases.B.only operating leases.C.only capital leases.D.any kind of leases anytime.E.None of the above.Difficulty level: EasyTopic: ADVANTAGE TO LEASINGType: CONCEPTS12.A leveraged lease typically involves a non-recourse loan in which:A.the lessee's payments go directly to the lender in case of default.B.the lessor is not obligated in case of default.C.the third party lenders have a first lien on the assets.D.All of the above.E.None of the above.Difficulty level: MediumTopic: LEVERAGED LEASEType: CONCEPTS13.For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?A.The lessee can purchase the asset below fair market value at the end of the lease.B.The lease transfers ownership of the asset to the lessee by the end of the lease.C.The lease term is more than 75% of the asset's economic life.D.The present value of the lease payments is more than 90% of the asset's market value at lease inception.E.All of the above would lead to the lease being considered a capital lease.Difficulty level: MediumTopic: CAPITAL LEASEType: CONCEPTS14.Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?A.Capital leases do not have to be put on the balance sheet; only financial leases do.B.Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement.C.Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000.D.Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement.E.None of the above.Difficulty level: EasyTopic: CAPITAL LEASEType: CONCEPTS15.Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:A.capital leases appear financially stronger than firms that used debt to purchase the asset.B.operating leases appear financially stronger than firms that used debt to purchase the asset.C.leases of any type appear financially stronger than firms that used debt to purchase the asset.D.All of the above.E.None of the above.Difficulty level: ChallengeTopic: FASB 13Type: CONCEPTS16.Which of the following is not an implication of FASB 13, Accounting for Leases?A.FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet.B.FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet.C.FASB 13 allows for off-balance-sheet financing for operating leases.D.All of the above.E.None of the above.Difficulty level: MediumTopic: FASB 13Type: CONCEPTS17.The reason the IRS is most concerned about lease contracts is:A.firms that lease generally pay no taxes.B.that leasing usually leads to bankruptcy.C.that leases can be set up solely to avoid taxes.D.because leasing leads to off-balance-sheet-financing.E.All of the above.Difficulty level: EasyTopic: TAX IMPLICATIONSType: CONCEPTS18.A lease with high payments early in its life which then decline to termination would:A.provide greater cash flow to the lessee in the beginning years.B.be evidence of tax avoidance and not acceptable to the IRS.C.be qualified as a capital lease under FASB 13.D.provide a lower residual value and thus ensure a bargain-purchase price option.E.All of the above.Difficulty level: MediumTopic: TAX IMPLICATIONSType: CONCEPTS19.In valuing the lease versus purchase option, the relevant cash flows are the:A.tax shield from depreciation.B.investment outlay for the equipment.C.a decrease in the firm's operating costs that are not affected by leasing.D.All of the above are relevant.E.None of the above are relevant.Difficulty level: MediumTopic: LEASE VS. BUYType: CONCEPTS20.The appropriate discount rate for valuing a financial lease is:A.the firm's after-tax weighted average cost of capital.B.the after-tax required return on assets of risks similar to the leased asset.C.the after-tax cost of secured borrowing.D.Either A or B.E.All of the above.Difficulty level: EasyTopic: APPROPRIATE DISCOUNT RATEType: CONCEPTS21.The WACC is not used in the lease versus purchase decision because:A.the WACC was used in the decision to acquire the asset, this is only a financing decision.B.the WACC is used only when a lease alone is considered and not a lease versus purchase.C.the WACC does not include the lease cost of capital and therefore should not be used.D.tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.E.when a bank arranges a lease they do not consider the lessee's cost of capital.Difficulty level: ChallengeTopic: APPROPRIATE DISCOUNT RATEType: CONCEPTS22.Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because:A.lenders are concerned about the firm's total liabilities and related cash flow.B.debt displacement occurs with leasing.C.less future debt can be raised for a growing firm when a lease is used.D.All of the above.E.None of the above.Difficulty level: MediumTopic: FINANCIAL LEASEType: CONCEPTS23.______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose.A.Early balloon paymentste balloon paymentsC.Capitalizing a leaseD.Transfer of lease payments to a second ownerE.None of the aboveDifficulty level: MediumTopic: TAX IMPLICATIONSType: CONCEPTS24.Debt displacement is associated with leases because:A.all assets not purchased with equity use debt financing.B.debt is always a cheaper source of financing and preferred to equity financing.C.FASB 13 and the IRS mandate debt displacement.D.lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.E.None of the above.Difficulty level: ChallengeTopic: LEASES AND DEBTType: CONCEPTS25.A lease is likely to be most beneficial to both parties when:A.the lessor's tax rate is lower than the lessee's.B.the lessor's tax rate is higher than the lessee's.C.the lessor's tax rate is equal to the lessee's.D.a lease cannot be beneficial to both parties.E.a lease always has zero NPV, so both parties always break even.Difficulty level: ChallengeTopic: TAX IMPLICATIONSType: CONCEPTS26.The price or lease payment that the lessee sets as their bound is known as:A.the present value of the tax shields.B.the reservation payment, L MIN.C.the present value of operating savings.D.the reservation payment, L MAX.E.None of the above.Difficulty level: MediumTopic: RESERVATION PAYMENTType: CONCEPTS27.Which of the following is probably not a good reason for leasing instead of buying?A.Taxes may be reduced by leasing.B.Leasing may reduce transactions costs.C.Leasing may provide a beneficial reduction of uncertainty.D.All of the above are good reasons.E.All of the above are not good reasons.Difficulty level: MediumTopic: REASON FOR LEASINGType: CONCEPTS28.Which of the following is probably a good reason for leasing instead of buying?A.Leasing provides 100% financing.B.Leasing is not considered a form of debt financing.C.Leasing may increase EPS relative to buying.D.All of the above are good reasons.E.None of the above is a good reason.Difficulty level: MediumTopic: REASON FOR LEASINGType: CONCEPTS29.Some assets are leased more than others because:A.the value of the asset under a lease is not highly affected by term of use or maintenance decisions.B.a lease may be used to fool clients into "buying" high priced assets above market value.C.leasing allows sellers to attract clients with low prices as the basis for setting the contract.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: REASON FOR LEASINGType: CONCEPTS30.To meet IRS guidelines for leasing, the lease should:A.limit the lessee's right to issue debt or pay dividends while the lease is operative.B.not limit the lessee's right to issue debt or pay dividends while the lease is operative.C.pay a very high return to the lessor.D.transfer ownership of the asset at the end of the lease at below fair market value.E.be over 30 years.Difficulty level: MediumTopic: TAX IMPLICATIONSType: CONCEPTS。