• The exam is comprehensive and covers Chapters 8, 14, 15, 17-23, 25, and 26; Weeks 1-7 content; and all course TCOs. 1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT?
(a) The tax shields should be discounted at the unlevered cost of equity. (b) The value of a growing tax shield is greater than the value of a constant tax shield. (c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. (d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions. (e) The total value of the firm is independent of the amount of debt it uses. (Points : 20)
2. (TCO D) Which of the following statements is most CORRECT?
(a) In a private placement, securities are sold to private (individual) investors rather than to institutions. (b) Private placements occur most frequently with stocks, but bonds can also be sold in a private placement. (c) Private placements are convenient for issuers, but the convenience is offset by higher flotation costs. (d) The SEC requires that all private placements be handled by a registered investment banker. (e) Private placements can generally bring in funds faster than is the case with public offerings. (Points : 20)
3. (TCO E) Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm has the option to buy these tools. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at interest rate of 10% and buy the tools. The loan payments would be made at the end of each year. If it decides to lease or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. The Total Cash Outflows from the Cost of Purchase are the following: (Year 1)+208; (Year 2) +208; (Year 3) -4,592; all occurring at the end of respective years. Calculate the leasing cash outflows, and compare the Present Values. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.)
(e) $123 (Points : 20)
4. (TCO I) Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?
(a) 1 pound = $1.8000
(b) 1 pound = $1.6582
(c) 1 pound = $1.0000
(d) 1 pound = $0.8500
(e) 1 pound = $0.6031 (Points : 20)
|1. (TCO C) Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is | |$550,000, and its board of directors has decreed that no new stock can be issued during the coming year. If the firm follows the | |residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure? | | | |(a) $673,652 | |(b) $709,107 | |(c) $746,429...