Question 1

Which of the following statements is false?

Accepted Answer

A)  If we can identify a comparison firm whose assets have the same risk as the project being evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the cost of capital for the project. 
B)  We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital, which we refer to as the firm's weighted average cost of capital (WAC
C) . 
C)  The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered. 
D)  When evaluating any potential investment project, we must use a discount rate that is appropriate given the risk of the project's free cash flow. 
A)  If we can identify a comparison firm whose assets have the same risk as the project being evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the cost of capital for the project. 
B)  We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital, which we refer to as the firm's weighted average cost of capital (WAC
C) . 
C)  The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered. 
D)  When evaluating any potential investment project, we must use a discount rate that is appropriate given the risk of the project's free cash flow.

Question 2

The example of Canadian Jet Set Airline's expansion by issuing new equity proves that

Accepted Answer

A)  any gain or loss associated with the transaction will result from the expected return of the investments the firm makes with the funds raised. 
B)  any gain or loss associated with the transaction will result from the realized return of the investments the firm makes with the funds raised. 
C)  any gain or loss associated with the transaction will result from the required return of the investments the firm makes with the funds raised. 
D)  any gain or loss associated with the transaction will result from the NPV of the investments the firm makes with the funds raised. 
A)  any gain or loss associated with the transaction will result from the expected return of the investments the firm makes with the funds raised. 
B)  any gain or loss associated with the transaction will result from the realized return of the investments the firm makes with the funds raised. 
C)  any gain or loss associated with the transaction will result from the required return of the investments the firm makes with the funds raised. 
D)  any gain or loss associated with the transaction will result from the NPV of the investments the firm makes with the funds raised.

Question 3

Use the information for the question(s) below.
Consider two firms: firm Without has no debt, and firm With has debt of $10,000 on which it pays interest of 5% per year. Both companies have identical projects that generate free cash flows of $1,000 or $2,000 each year. Suppose that there are no taxes, and after paying any interest on debt, both companies use all remaining cash free cash flows to pay dividends each year.
-Suppose you own 10% of the equity of With.What is another portfolio you could hold that would provide you with the same exact cash flows?

Accepted Answer

The cash flows for a 10% ownership stake

Question 4

Use the information for the question(s) below.
Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares outstanding and $12 million dollars in debt at an interest rate of 5%.
-Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5,000 of your own money to invest and you plan on buying Without stock.Using homemade leverage,how much do you need to borrow in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5,000 investment in With stock?

Accepted Answer

A)  $10,000 
B)  $5,000 
C)  $2,500 
D)  $0 
A)  $10,000 
B)  $5,000 
C)  $2,500 
D)  $0

Question 5

Which of the following statements is correct?

Accepted Answer

A)  Leverage reduces the risk of equity even when there is no risk that the firm will default. 
B)  Leverage increases the risk of debt even when there is no risk that the firm will default. 
C)  Leverage increases the risk of equity even when there is no risk that the firm will default. 
D)  Leverage reduces the risk of debt even when there is no risk that the firm will default. 
A)  Leverage reduces the risk of equity even when there is no risk that the firm will default. 
B)  Leverage increases the risk of debt even when there is no risk that the firm will default. 
C)  Leverage increases the risk of equity even when there is no risk that the firm will default. 
D)  Leverage reduces the risk of debt even when there is no risk that the firm will default.

Question 6

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cost of capital for the firm's levered equity is closest to:

Accepted Answer

A)  45% 
B)  25% 
C)  15% 
D)  95% 
A)  45% 
B)  25% 
C)  15% 
D)  95%

Which of the following statements is false?

The example of Canadian Jet Set Airline's expansion by issuing new equity proves that

Which of the following statements is correct?

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cost of capital for the firm's levered equity is closest to:

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 17: Capital Structure in a Perfect Market

Which of the following statements is false?

The example of Canadian Jet Set Airline's expansion by issuing new equity proves that

Which of the following statements is correct?

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cost of capital for the firm's levered equity is closest to:

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters