Fin 540 midterm exam 100% score

FIN 540 Midterm Exam 100% Score

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Question 1

 

Which of the following statements is most CORRECT?
Answer :

 

 

Question 2

 

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

 

 

Question 3

 

Which of the following statements is NOT
CORRECT?
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Question 4

 

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

 

 

Question 5

 

Which of the following statements is most CORRECT?
Answer :

 

 

Question 6

 

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

 

 

 

Question 7

 

Which of the following statements is most CORRECT?
Answer :

 

 

Question 8

 

Which of the following statements is most CORRECT?
Answer :

 

 

Question 9

 

Which of the following statements concerning warrants is correct?
Answer :

 

 

Question 10

 

Operating leases often have terms that include
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Question 11

 

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

 

 

Question 12

 

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

 

 

Question 13

 

Which of the following statements is most CORRECT?
Answer :

 

 

Question 14

 

Which of the following statements is most CORRECT?
Answer :

 

 

Question 15

 

Which of the following statements is most CORRECT?
Answer :

 

 

Question 16

 

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

 

 

Question 17

 

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

 

 

Question 18

 

In the lease versus buy decision, leasing is often preferable
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Question 19

 

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

 

 

Question 20

 

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

 

What will the after-tax annual interest savings for NYW be if the refunding takes place?
Answer :

 

 

Question 21

 

Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. Great Subs’ analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Eastern’s pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?
Answer :

 

 

Question 22

 

Orient Airlines’ common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2019. What is the conversion value of the bond?
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Question 23

 

Warren Corporation’s stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm’s straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?
Answer :

 

 

Question 24

 

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

 

 

Question 25

 

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?
Answer :

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