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    1.introduction

    quiz 1

    1、which type of business organization has all the respective rights and privileges of a legal person?
        a、sole proprietorship
        b、corporation
        c、general partnership
        d、limited partnership

    2、the principal-agent problem arises
        a、because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest.
        b、because of the separation of ownership and control in a corporation.
        c、both a and b
        d、none of the above

    3、in the management buyout, the managers of the firm buy out the existing stockholders and make the company a private firm. is this a way of reducing of conflict of interests between stockholders and managers?
        a、yes,managers now also become the lead stockholders in the firm.
        b、yes, managers will feel happy.
        c、no,managers now also become the lead stockholders in the firm.
        d、no, managers will feel happy.

    4、in a corporation, the ultimate decisions regarding business matters are made by
        a、the board of directors
        b、debt holders
        c、shareholders
        d、investors

    5、which is not the advantages of a corporation?
        a、easy transfer of ownership
        b、limited life
        c、easy to get financing
        d、entitled to sign contracts

    6、which of the following statements is false?
        a、in bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders.
        b、because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default.
        c、as long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders.
        d、if the corporation fails to satisfy debt holdersʹ claims, debt holders may lose control of the firm.

    7、which of the following assumptions would you need for stock maximization to be the “right” objective for a business to adopt?
        a、there are no social costs
        b、managers act in the best interests of stockholders
        c、lenders to the firm are fully protected from expropriation
        d、all of the above

    8、which one is not the character a good goal should possess?
        a、the goal should be very clear.
        b、the goal should be measurable.
        c、the goal should not bring costs to other businesses or groups.
        d、the goal should be easily changeable and adjustable.

    9、which one is not the assumption on which the maximization of stock price is based?
        a、the manager can control the issuing amount of bonds
        b、the manager does not consider his own interests.
        c、the creditor is completely protected in order to avoid wealth being exploited by shareholders.
        d、business managers will not use their own unique information to mislead financial markets.

    10、if shareholders are unhappy with a ceoʹs performance, they are most likely to
        a、buy more shares in an effort to gain control of the firm.
        b、file a shareholder resolution.
        c、replace the ceo through a grassroots shareholder uprising.
        d、sell their shares.

    2. introduction of investment decisions

    quiz 2

    1、at an annual interest rate of 7%, the future value of $5,000 in five years is closest to:
        a、$3,565
        b、$6,750
        c、$7,015
        d、$7,035

    2、at an annual interest rate of 7%, the present value of $5,000 received in five years is closest to:
        a、$3,565
        b、$6,750
        c、$7,015
        d、$7,035

    3、which of the following statements is false?
        a、the process of moving a value or cash flow forward in time is known as compounding.
        b、the effect of earning interest on interest is known as compound interest.
        c、it is only possible to compare or combine values at the same point in time.
        d、a dollar in the future is worth more than a dollar today.

    4、which of the following statements is false?
        a、finding the present value and compounding are the same.
        b、a dollar today and a dollar in one year are not equivalent.
        c、if you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time.
        d、the equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

    5、which of the following statements regarding arbitrage is the most correct?
        a、any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity.
        b、any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity.
        c、we call a competitive market in which there are no arbitrage opportunities an arbitrage market.
        d、the practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.

    6、which of the following statements regarding the law of one price is incorrect?
        a、at any point in time, the price of two equivalent goods trading in different competitive markets will be the same.
        b、one useful consequence of the law of one price is that when evaluating costs and benefits to compute a net present value, we can use any competitive price to determine a cash value, without checking the price in all possible markets.
        c、if equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets.
        d、an important property of the law of one price is that it holds even in markets where arbitrage is not possible.

    7、a mcdonald's big mac value meal consists of a big mac sandwich ($2.99), large coke ($1.39), and a large fry ($1.09). assuming that there is a competitive market for mcdonald's food items, at what price must a big mac value meal sell to insure the absence of an arbitrage opportunity and uphold the law of one price?
        a、$4.08
        b、$4.38
        c、$5.47
        d、$5.77

    8、walgreen company (nyse: wag) is currently trading at $48.75 on the nyse. walgreen company is also listed on nasdaq and assume it is currently trading on nasdaq at $48.50. does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on a block trade of 100 shares?
        a、no, no arbitrage opportunity exists.
        b、yes, buy on nasdaq and sell on nyse, make $25.
        c、yes, buy on nyse and sell on nasdaq, make $25.
        d、yes, buy on nasdaq and sell on nyse, make $250.

    9、suppose the risk free interest rate is 3.9%. the price per $100 face value of a three-year, zero-coupon, risk-free bond is closest to:
        a、$93.80
        b、$90.06
        c、$89.16
        d、$86.39

    10、nogrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely. if nogrowth's equity cost of capital is 12%, then the value of a share of nogrowth's stock is closest to:
        a、$10.00
        b、$15.00
        c、$14.00
        d、$12.50

    3.methods of investment decisions

    quiz 3

    1、which of the following statements is false?
        a、about 75% of firms surveyed used the npv rule for making investment decisions.
        b、if you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
        c、to decide whether to invest using the npv rule, we need to know the cost of capital.
        d、npv is positive only for discount rates greater than the internal rate of return.

    2、sarah palin reportedly was paid a $11 million advance to write her book going rogue. the book took one year to write. in the time she spent writing, palin could have been paid to give speeches and appear on tv news as a political commentator. given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. assume that she was unable to fulfill her media commitments of appearing on tv news as a political commentator or give speeches. while she was writing the book. assuming that palin's cost of capital is 10%, then the npv of her book deal is closest to:
        a、$2.00 million
        b、$2.20 million
        c、$3.00 million
        d、$3.75 million

    3、sarah palin reportedly was paid a $11 million advance to write her book going rogue. the book took one year to write. in the time she spent writing, palin could have been paid to give speeches and appear on tv news as a political commentator. given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. assume that she was unable to fulfill her media commitments of appearing on tv news as a political commentator or give speeches. while she was writing the book. the irr of palin's book deal is closest to:
        a、-27.25%
        b、-37.50%
        c、27.25%
        d、37.50%

    4、the npv profile
        a、shows the payback period - the point at which npv is positive.
        b、shows the internal rate of return - the point at which npv is zero.
        c、shows the npv over a range of discount rates.
        d、b and c are correct.

    5、rearden metals is considering opening a strip mining operation to provide some of the raw materials needed in producing rearden metal. the initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. the mine is expected to generate $16 million worth of ore per year for the next 12 years. at the end of the 12th year rearden will need to spend $20 million to restore the land to its original pristine nature appearance. the number of potential irrs that exist for rearden's mining operation is equal to:
        a、0
        b、1
        c、2
        d、12

    6、which of the following statements is false?
        a、the irr investment rule will identify the correct decision in many, but not all, situations.
        b、by setting the npv equal to zero and solving for r, we find the irr.
        c、if you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
        d、the simplest investment rule is the npv investment rule.

    7、when using the internal rate of return (irr) investment rule, we compare:
        a、the average return on the investment opportunity to returns on all other investment opportunities in the market.
        b、the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity.
        c、the npv of the investment opportunity to the average return on the investment opportunity.
        d、the average return on the investment opportunity to the risk-free rate of return.

    8、consider the following two projects: alpha -79 20 25 30 35 40 n/a n/a beta -80 25 25 25 25 25 25 25 which of the following statements is correct if both are mutually exclusive? suppose the discount rate is 10%.
        a、you should invest in project beta since npvbeta > npvalpha.
        b、you should invest in project alpha since irralpha > irrbeta.
        c、your should invest in project alpha since npvalpha < 0.
        d、you should invest in project beta since eaabeta > eaaalpha.

    9、the internal rate of return rule can result in the wrong decision if the projects being compared have:
        a、differences in scale.
        b、differences in timing.
        c、differences in npv.
        d、a and b are correct.

    10、which of the following statements is false?
        a、when using the incremental irr rule, you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative.
        b、picking one project over another simply because it has a larger irr can lead to mistakes.
        c、problems arise using the irr method when the mutually exclusive investments have differences in scale.
        d、when the risks of two projects are different, only the npv rule will give a reliable answer.

    4. applications of investment decisions

    quiz 4

    1、which of the following statements is false?
        a、many projects use a resource that the company already owns.
        b、when evaluating a capital budgeting decision, we generally include interest expense.
        c、only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project.
        d、as a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

    2、which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?
        a、the tax savings brought about by the project's depreciation expense.
        b、the cost of a marketing survey you conducted to determine demand for the proposed project
        c、interest payments on debt used to finance the project
        d、research and development expenditures you have made

    3、which of the following statements is false?
        a、sales will ultimately decline as the product nears obsolescence or faces increased competition.
        b、managers sometimes continue to invest in a project that has a negative npv because they have already invested a large amount in the project and feel that by not continuing it, the prior investment will wasted.
        c、with straight-line depreciation the asset's cost is divided equally over its life.
        d、a projects unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on an pre-tax basis.

    4、which of the following statements is false?
        a、most projects will require the firm to invest in net working capital.
        b、the main components of net working capital are cash, inventory, receivables, and property, plant and equipment.
        c、δnwct = nwct - nwct - 1
        d、in the final year of a project, the firm ultimately recovers the investment in net working capital.

    5、which of the following statements is false?
        a、because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project.
        b、sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis.
        c、overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation.
        d、when computing the incremental earnings of an investment decision, we should include all changes between the firm's earnings with the project versus without the project.

    6、the value of currently unused warehouse space that will be used as part of a new capital budgeting project is:
        a、an opportunity cost.
        b、irrelevant to the investment decision.
        c、an overhead expense.
        d、a sunk cost.

    7、which of the following statements is false?
        a、sales will ultimately decline as the product nears obsolescence or faces increased competition.
        b、managers sometimes continue to invest in a project that has a negative npv because they have already invested a large amount in the project and feel that by not continuing it, the prior investment will wasted.
        c、with straight-line depreciation the asset's cost is divided equally over its life.
        d、a projects unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on an pre-tax basis.

    8、which of the following statements is false?
        a、the simplest method used to calculate depreciation is the straight-line method.
        b、a sunk cost is any unrecoverable cost for which the firm is already liable.
        c、unlevered net income = ebit × tc
        d、the decision to continue or abandon should be based only on the incremental costs and benefits of the project going forward.

    9、use the following information to answer the question(s) below. beta volatility "eenie" 0.45 20% "meenie"0.75 18% "miney"1.05 35% "moe" 1.20 25% assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%. the equity cost of capital for "miney" is closest to:
        a、6.30%
        b、7.50%
        c、9.30%
        d、9.75%

    10、based on above information, the risk premium for "meenie" is closest to:
        a、4.50%
        b、7.50%
        c、9.30%
        d、9.75%

    midterm

    midterm

    1、your great aunt matilda put some money in an account for you on the day you were born. this account pays 8% interest per year. on your 21st birthday the account balance was $5,033.83. the amount of money that your great aunt matilda originally put in the account is closest to:
        a、$600
        b、$800
        c、$1,000
        d、$1,200

    2、your great aunt matilda put some money in an account for you on the day you were born. this account pays 8% interest per year. on your 21st birthday the account balance was $5,033.83. the amount of money that would be in the account if you left the money there until your 65th birthday is closest to:
        a、$29,556
        b、$148,780
        c、$168,824
        d、$748,932

    3、if the risk-free rate of interest (rf) is 3.5%, then you should be indifferent between receiving $1000 in one-year or:
        a、$965.00 today.
        b、$966.18 today.
        c、$1000.00 today.
        d、$1035.00 today.

    4、which of the following statements regarding arbitrage and security prices is incorrect?
        a、we call the price of a security in a normal market the no-arbitrage price for the security.
        b、in financial markets it is possible to sell a security you do not own by doing a short sale.
        c、when a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
        d、the general formula for the no-arbitrage price of a security is price(security) = pv(all cash flows paid by the security).

    5、consider two securities, a & b. suppose a third security, c, has the same cash flows as a and b combined. given this information about securities a,b, & c, which of the following statements is incorrect?
        a、if the total price of a and b is cheaper than the price of c, then we could make a profit selling a and b and buying c.
        b、price(c) = price(a) price(b)
        c、because security c is equivalent to the portfolio of a and b, by the law of one price they must have the same price.
        d、the relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts.

    6、suppose that bondi inc. is a holding company that owns both pizza hut and kentucky fried chicken franchised restaurants. if the value of bondi is $130 million, and the pizza hut franchises are worth $70 million, then what is the value of the kentucky fried chicken franchises?
        a、$60 million
        b、$70 million
        c、$130 million
        d、unable to determine with the information provided

    7、suppose the current zero-coupon yield curve for risk-free bonds is as follows: maturity (years) 1 2 3 4 5 ytm 3.25% 3.50% 3.90% 4.25% 4.40% the price per $100 face value of a three-year, zero-coupon, risk-free bond is closest to:
        a、$93.80
        b、$90.06
        c、$89.16
        d、$86.39

    8、suppose a ten-year bond with semiannual coupons has a price of $1,071.06 and a yield to maturity of 7%. this bond's coupon rate is closest to:
        a、3.5%
        b、6.0%
        c、7.0%
        d、8.0%

    9、consider a zero coupon bond with 20 years to maturity. the price will this bond trade if the ytm is 6% is closest to:
        a、$215
        b、$312
        c、$335
        d、$306

    10、von bora corporation (vbc) is expected to pay a $2.00 dividend at the end of this year. if you expect vbc's dividend to grow by 5% per year forever and vbc's equity cost of capital is 13%, then the value of a share of vbs stock is closest to:
        a、$25.00
        b、$40.00
        c、$15.40
        d、$11.10

    11、which of the following statements is false?
        a、in general, the difference between the cost of capital and the irr is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
        b、the irr can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.
        c、if you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
        d、if the cost of capital estimate is more than the irr, the npv will be positive.

    12、consider a project with the following cash flows: year cash flow 0 -10,000 1 4,000 2 4,000 3 4,000 4 4,000 if the appropriate discount rate for this project is 15%, then the npv is closest to:
        a、$6,000
        b、-$867
        c、$1,420
        d、$867

    13、larry the cucumber has been offered $14 million to star in the lead role of the next three larry boy adventure movies. if larry takes this offer, he will have to forgo acting in other veggie movies that would pay him $5 million at the end of each of the next three years. assume larry's personal cost of capital is 10% per year. the npv of larry's three movie larry boy offer is closest to:
        a、3.5 million
        b、-1.6 million
        c、1.6 million
        d、-1.0 million

    14、frank dewey esquire from the firm of dewey, cheatum, and howe, has been offered an upfront retainer of $30,000 to provide legal services over the next 12 months to taggart transcontinental. in return for this upfront payment, taggart transcontinental would have access to 8 hours of legal services from frank for each of the next 12 months. frank's normal billable rate is $250 per hour for legal services. assuming that dewey's cost of capital is 12% ear, then the number of potential irrs that exist for this problem is equal to:
        a、0
        b、1
        c、2
        d、12

    15、which of the following statements is false?
        a、the irr investment rule states you should turn down any investment opportunity where the irr is less than the opportunity cost of capital.
        b、the irr investment rule states that you should take any investment opportunity where the irr exceeds the opportunity cost of capital.
        c、since the irr rule is based upon the rate at which the npv equals zero, like the npv decision rule, the irr decision rule will always identify the correct investment decisions.
        d、there are situations in which multiple irrs exist.

    16、consider the following two projects: project year 0 c/f year 1 c/f year 2 c/f year 3 c/f year 4 c/f year 5 c/f year 6 c/f year 7 c/f discount rate alpha -79 20 25 30 35 40 n/a n/a 15% beta -80 25 25 25 25 25 25 25 15% the internal rate of return (irr) for project alpha and project beta are closest to:
        a、25.0%, 25.0%
        b、22.2%, 22.7%
        c、24.5%, 22.2%
        d、22.7%, 24.5%

    17、consider the following two projects: alpha -79 20 25 30 35 40 n/a n/a 15% beta -80 25 25 25 25 25 25 25 15% project year 0 c/f year 1 c/f year 2 c/f year 3 c/f year 4 c/f year 5 c/f year 6 c/f year 7 c/f discount rate alpha -79 20 25 30 35 40 n/a n/a 15% beta -80 25 25 25 25 25 25 25 15% which of the following statements is correct if both are mutually exclusive?
        a、you should invest in project beta since npvbeta > npvalpha.
        b、you should invest in project alpha since irralpha > irrbeta.
        c、your should invest in project alpha since npvalpha < 0.
        d、you should invest in project beta since eaabeta > eaaalpha.

    18、which of the following statements is false?
        a、the incremental irr need not exist.
        b、if a change in the timing of the cash flows does not affect the npv, then the change in timing will not impact the irr.
        c、although the incremental irr rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly.
        d、when projects are mutually exclusive, it is not enough to determine which projects have positive npvs.

    19、consider two mutually exclusive projects a & b. if you subtract the cash flows of opportunity b from the cash flows of opportunity a, then you should:
        a、take opportunity a if the regular irr exceeds the cost of capital.
        b、take opportunity a if the incremental irr exceeds the cost of capital.
        c、take opportunity b if the regular irr exceeds the cost of capital.
        d、take opportunity b if the incremental irr exceeds the cost of capital.

    20、assume that projects alpha and beta are mutually exclusive. which of the following statements is true regarding the investment decision tools' suitability for deciding between projects alpha & beta?
        a、the incremental irr should not be used since the projects have different lives
        b、the incremental irr should not be used since the projects have different discount rates
        c、the incremental irr should not be used since the projects have different cash flow patterns.
        d、both the npv and incremental irr approaches are appropriate to solve this problem.

    21、which of the following statements is false?
        a、project externalities are direct effects of the project that may increase of decrease the profits of other business activities of the firm.
        b、incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision.
        c、the average selling price of a product and its cost of production will generally change over time.
        d、any money that has already been spent is a sunk cost and therefore irrelevant in the capital budgeting process.

    22、a decrease in the sales of a current project because of the launching of a new project is:
        a、cannibalization
        b、a sunk cost.
        c、an overhead expense.
        d、irrelevant to the investment decision.

    23、which of the following statements is false?
        a、when evaluating a capital budgeting decision, the correct tax rate to use is the firm's average corporate tax rate.
        b、to determine the capital budget, firms analyze alternative projects and decide which ones to accept through a process called capital budgeting.
        c、a new product typically has lower sales initially, as customers gradually become aware of the product.
        d、sunk costs have been or will be paid regardless of the decision whether or not to proceed with the project.

    24、which of the following statements is false?
        a、depreciation is a method used for accounting and tax purposes to allocate the original purchase cost of the asset over its life.
        b、sometimes the firm explicitly forecast free cash flow over a shorter horizon than the full horizon of the project or investment.
        c、earnings include the cost of capital investments, but do not include non-cash charges, such as depreciation.
        d、firms often report a different depreciation expense for accounting and for tax purposes.

    25、which of the following statements is false?
        a、when evaluating a capital budgeting decision, the correct tax rate to use is the firm's average corporate tax rate.
        b、to determine the capital budget, firms analyze alternative projects and decide which ones to accept through a process called capital budgeting.
        c、a new product typically has lower sales initially, as customers gradually become aware of the product.
        d、sunk costs have been or will be paid regardless of the decision whether or not to proceed with the project.

    26、which of the following costs would you consider when making a capital budgeting decision?
        a、sunk cost
        b、opportunity cost
        c、interest expense
        d、fixed overhead cost

    27、money that has been or will be paid regardless of the decision whether or not to proceed with the project is:
        a、cannibalization
        b、considered as part of the initial investment in the project.
        c、an opportunity cost.
        d、a sunk cost.

    28、which of the following statements is false?
        a、many projects use a resource that the company already owns.
        b、when evaluating a capital budgeting decision, we generally include interest expense.
        c、only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project.
        d、as a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

    29、use the following information to answer the question(s) below. beta volatility "eenie" 0.45 20% "meenie"0.75 18% "miney"1.05 35% "moe" 1.20 25% assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.which firm has the most total risk?
        a、eenie
        b、meenie
        c、miney
        d、moe

    30、use the following information to answer the question(s) below. beta volatility "eenie" 0.45 20% "meenie"0.75 18% "miney"1.05 35% "moe" 1.20 25% based on above information, which firm has the highest cost of equity capital?
        a、eenie
        b、meenie
        c、miney
        d、moe

    5.theory of financing decisions i

    quiz 5

    1、equity in a firm with no debt is called:
        a、levered equity.
        b、unlevered equity.
        c、riskless equity.
        d、risky equity.

    2、which of the following statements is false?
        a、leverage decreases the risk of the equity of a firm.
        b、because the cash flows of the debt and equity sum to the cash flows of the project, by the law of one price the combined values of debt and equity must be equal to the cash flows of the project.
        c、franco modigliani and merton miller argued that with perfect capital markets, the total value of a firm should not depend on its capital structure.
        d、it is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.

    3、suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder. in this situation, the cash flow that equity holders will receive in one year in a strong economy is closest to:
        a、$117,000
        b、$75,000
        c、$50,000
        d、$0

    4、which of the following statements is false?
        a、as long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise.
        b、if securities are fairly priced, then buying or selling securities has an npv of zero and, therefore, should not change the value of a firm.
        c、the future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front.
        d、an investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio.

    5、suppose that rearden metal currently has no debt and has an equity cost of capital of 12%. rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. assume perfect capital markets. if taggart borrows until they achieved a debt -to-equity ratio of 50%, then rearden's levered cost of equity would be closest to:
        a、10.0%
        b、12.0%
        c、15.0%
        d、16.0%

    6、consider the following equation: e d = u = a the u in this equation represents:
        a、the value of the firm's equity.
        b、the market value of the firm's assets.
        c、the value of the firm's unlevered equity.
        d、the value of the firm's debt.

    7、which of the following statements is false?
        a、holding cash has the opposite effect of leverage on risk and return.
        b、we use the market value of the firm's net debt when computing its wacc and unlevered beta to measure the cost of capital and market risk of the firm’s business assets.
        c、since the wacc does not change with the use of leverage, the value of the firm's free cash flow evaluated using the wacc does not change, and so the enterprise value of the firm does not depend on its financing choices.
        d、even if the firm's capital structure is more complex, the wacc is calculated by computing the weighted average cost of only the firm’s debt and equity.

    8、the following equation: x = e/(e d) re d/(e d) rd can be used to calculate all of the following except:
        a、the cost of capital for the firm's assets.
        b、the levered cost of equity.
        c、the unlevered cost of equity.
        d、the weighted average cost of capital.

    9、galt industries has no debt, total equity capitalization of $600 million, and an equity beta of 1.2. included in galt's assets is $90 million in cash and risk-free securities. assume the risk-free rate is 4% and the market risk premium is 6%. galt's enterprise value is closest to:
        a、$90 million
        b、$510 million
        c、$600 million
        d、$690 million

    10、which of the following statements is false?
        a、as long as investors can borrow or lend at the same interest rate as the firm, homemade leverage is a perfect substitute for the use of leverage by the firm.
        b、when investors use leverage in their own portfolios to adjust the leverage choice made by the firm, we say that they are using homemade leverage.
        c、the value of the firm is determined by the present value of the cash flows from its current and future investments.
        d、the investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of the firm.

    6.theory of financing decisions ii

    quiz 6

    1、which of the following statements is false?
        a、equity holders expect to receive dividends and the firm is legally obligated to pay them.
        b、a firm that fails to make the required interest or principal payments on the debt is in default.
        c、in the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.
        d、after a firm defaults, debt holders are given certain rights to the assets of the firm.

    2、which of the following statements is false?
        a、when a firm fails to make a required payment to debt holders, it is in bankruptcy.
        b、with perfect capital markets, the risk of bankruptcy is not a disadvantage of debt—bankruptcy simply shifts the ownership of the firm from equity holders to debt holders without changing the total value available to all investors.
        c、bankruptcy is a long and complicated process that imposes both direct and indirect costs on the firm and its investors that the assumption of perfect capital markets ignores.
        d、bankruptcy is rarely simple and straightforward—equity holders don’t just "hand the keys" to debt holders the moment the firm defaults on a debt payment.

    3、which of the following statements is false?
        a、whether paid by the firm or its creditors, the indirect costs of bankruptcy increase the value of the assets that the firm’s investors will ultimately receive.
        b、in addition to the money spent by the firm, the creditors may incur costs during the bankruptcy process.
        c、the bankruptcy code is designed to provide an orderly process for settling a firm’s debts.
        d、to ensure that their rights and interests are respected, and to assist in valuing their claims in a proposed reorganization, creditors may seek separate legal representation and professional advice.

    4、which of the following statements is false?
        a、the costs of selling assets below their value are greatest for firms with assets that lack competitive, liquid markets.
        b、firms in financial distress tend to have difficulty collecting money that is owed to them.
        c、suppliers may be unwilling to provide a firm with inventory if they fear they will not be paid.
        d、the loss of customers is likely to be large for producers of raw materials (such as sugar or aluminum), as the value of these goods, once delivered, depends on the seller's continued success.

    5、which of the following is not an indirect cost of bankruptcy?
        a、loss of suppliers
        b、fire sales of assets
        c、costs of appraisers
        d、loss of employees

    6、which of the following is not a direct cost of bankruptcy?
        a、costs to creditors
        b、investment banking costs
        c、costs of accounting experts
        d、legal costs and fees

    7、which of the following statements is false?
        a、when a firm faces financial distress, shareholders have an incentive not to invest and to withdraw money from the firm if possible.
        b、because top managers often hold shares in the firm and are hired and retained with the approval of the board of directors, which itself is elected by shareholders, managers will generally make decisions that increase the value of the firm’s equity.
        c、an over-investment problem occurs when shareholders have an incentive to invest in risky positive-npv projects.
        d、a negative-npv project destroys value for the firm overall.

    8、which of the following statements is false?
        a、one disadvantage of using leverage is that it does not allow the original owners of the firm to maintain their equity stake.
        b、the separation of ownership and control creates the possibility of management entrenchment; facing little threat of being fired and replaced, managers are free to run the firm in their own best interests.
        c、managers also have their own personal interests, which may differ from those of both equity holders and debt holders.
        d、the costs of reduced effort and excessive spending on perks are another form of agency cost.

    9、the idea that claims in one's self-interest are credible only if they are supported by actions that would be too costly to take if the claims were untrue is known as the:
        a、pecking order hypothesis
        b、credibility principle.
        c、lemons principle.
        d、signaling theory of debt.

    10、which of the following influences a firm's choice of capital structure?
        a、taxes
        b、agency costs and benefits of leverage
        c、signaling and adverse selection
        d、all of the above influence capital structure decisions.

    7.capital budgeting and valuation with leverage

    quiz 7

    1、1. which of the following is not one of the simplifying assumptions made for the three main methods of capital budgeting?
        a、the firm pays out all earnings as dividends.
        b、the project has average risk.
        c、corporate taxes are the only market imperfection.
        d、the firm’s debt-equity ratio is constant.

    2、2. which of the following statements is false?
        a、because the wacc incorporates the tax savings from debt, we can compute the levered value of an investment, which is its value including the benefit of interest tax shields given the firm's leverage policy, by discounting its future free cash flow using the wacc.
        b、the wacc incorporates the benefit of the interest tax shield by using the firm's before-tax cost of capital for debt.
        c、when the market risk of the project is similar to the average market risk of the firm's investments, then its cost of capital is equivalent to the cost of capital for a portfolio of all of the firm's securities; that is, the project's cost of capital is equal to the firm’s weighted average cost of capital (wacc).
        d、a project's cost of capital depends on its risk.

    3、3. which of the following is not a step in the wacc valuation method?
        a、compute the value of the investment, including the tax benefit of leverage, by discounting the free cash flow of the investment using the wacc.
        b、compute the weighted average cost of capital.
        c、determine the free cash flow of the investment.
        d、adjust the wacc for the firm's current debt/equity ratio.

    4、4.which of the following statements is false?
        a、to determine the project's debt capacity for the interest tax shield calculation, we need to know the value of the project.
        b、to compute the present value of the interest tax shield, we need to determine the appropriate cost of capital.
        c、because we don’t value the tax shield separately, with the apv method we need to include the benefit of the tax shield in the discount rate as we do in the wacc method.
        d、a target leverage ratio means that the firm adjusts its debt proportionally to the project’s value or its cash flows.

    5、5. suppose luther industries is considering divesting one of its product lines. the product line is expected to generate free cash flows of $2 million per year, growing at a rate of 3% per year. luther has an equity cost of capital of 10%, a debt cost of capital of 7%, a marginal tax rate of 35%, and a debt-equity ratio of 2. this product line is of average risk and luther plans to maintain a constant debt-equity ratio. luther's unlevered cost of capital is closest to:
        a、8.0%
        b、8.5%
        c、9.0%
        d、6.4%

    6、6. which of the following statements is false?
        a、the project's free cash flow to equity shows the expected amount of additional cash the firm will have available to pay dividends (or conduct share repurchases) each year.
        b、the value of the project’s fcfe should be identical to the npv computed using the wacc and apv methods.
        c、the value of the project’s fcfe represents the gain to shareholders from the project.
        d、because interest payments are deducted before taxes, we adjust the firm's fcf by their before-tax cost.

    7、7. which of the following is not a step in valuation using the flow to equity method?
        a、determine the equity cost of capital, re.
        b、compute the equity value, e, by discounting the free cash flow to equity using the equity cost of capital.
        c、determine the free cash flow to equity of the investment.
        d、determine the before-tax cost of capital, ru.

    8、8. which of the following statements is false?
        a、for capital budgeting purposes, the project’s financing is the incremental financing that results if the firm takes on the project.
        b、projects with safer cash flows can support more debt before they increase the risk of financial distress for the firm.
        c、if the positive free cash flow from a project will increase the firm's cash holdings, then this growth in cash is equivalent to a reduction in the firm’s leverage.
        d、the incremental financing of a project corresponds directly to the financing that is directly tied to the project.

    9、9. which of the following questions is false?
        a、sometimes management may believe that the securities they are issuing are priced at less than (or more than) their true value. if so, the npv of the transaction, which is the difference between the actual money raised and the true value of the securities sold, should not be included in the value of the project.
        b、an alternative method of incorporating financial distress and agency costs is to first value the project ignoring these costs, and then value the incremental cash flows associated with financial distress and agency problems separately.
        c、when the debt level—and, therefore, the probability of financial distress—is high, the expected free cash flow will be reduced by the expected costs associated with financial distress and agency problems.
        d、if the financing of the project involves an equity issue, and if management believes that the equity will sell at a price that is less than its true value, this mispricing is a cost of the project for the existing shareholders.

    10、10. which of the following statements is false?
        a、when we relax the assumption of a constant debt-equity ratio, the fte method is relatively straightforward to use and is therefore the preferred method with alternative leverage policies.
        b、when debt levels are set according to a fixed schedule, we can discount the predetermined interest tax shields using the debt cost of capital, rd.
        c、with a constant interest coverage policy, the value of the interest tax shield is proportional to the project's unlevered value.
        d、when the firm keeps its interest payments to a target fraction of its fcf, we say it has a constant interest coverage ratio.

    8.allocation decisions

    quiz 8

    1、anyone who purchases the stock on or after the ________ date will not receive the dividend.
        a、distribution
        b、record
        c、ex-dividend
        d、declaration

    2、a(n) ________ is the most common way that firms repurchase shares.
        a、targeted repurchase
        b、dutch auction share repurchase
        c、tender offer
        d、open market share repurchases

    3、assume that omicron uses the entire $50 million in excess cash to pay a special dividend. the amount of the regular yearly dividends in the future is closest to:
        a、$4.50
        b、$5.00
        c、$4.00
        d、$9.00

    4、which of the following statements is false?
        a、when a firm pays a dividend, shareholders are taxed according to the dividend tax rate. if the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.
        b、when the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.
        c、firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.
        d、the optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

    5、which of the following statements is false?
        a、tax rates vary by income, by jurisdiction, and by whether the stock is held in a retirement account. because of these differences, firms may attract different groups of investors depending on their dividend policy.
        b、while many investors have a tax preference for share repurchases rather than dividends, the strength of that preference depends on the difference between the dividend tax rate and the capital gains tax rate that they face.
        c、long-term investors are more heavily taxed on capital gains, so they would prefer dividend payments to share repurchases.
        d、one-year investors, pension funds, and other non-taxed investors have no tax preference for share repurchases over dividends, they would prefer a payout policy that most closely matches their cash needs.

    6、which of the following statements is false?
        a、in perfect capital markets, buying and selling securities is a zero-npv transaction, so it should not affect firm value.
        b、making positive-npv investments will create value for the firm’s investors, whereas saving the cash or paying it out will not.
        c、in perfect capital markets, if a firm invests excess cash flows in financial securities, the firm’s choice of payout versus retention is irrelevant and does not affect the initial share price.
        d、after adjusting for investor taxes, there remains a substantial tax advantage for the firm to retain excess cash.

    7、which of the following statements is false?
        a、a firm must balance the tax costs of holding cash with the potential benefits of having to raise external funds in the future.
        b、paying out excess cash through dividends or share repurchases can boost the stock price by reducing managers’ ability and temptation to waste resources.
        c、if there is a reasonable likelihood that future earnings will be insufficient to fund future positive-npv investment opportunities, a firm may start accumulating cash to make up the difference.
        d、according to the managerial entrenchment theory of payout policy, managers pay out cash only when pressured to do so by the firm’s investors.

    8、which of the following statements is false?
        a、if firms smooth dividends, the firm’s dividend choice will contain information regarding management’s expectations of future earnings.
        b、because of the increasing popularity of repurchases, firms cut dividends much more frequently than they increase them.
        c、announcing a share repurchase today does not necessarily represent a long-term commitment to repurchase shares.
        d、while cutting the dividend is costly for managers in terms of their reputation and the reaction of investors, it is by no means as costly as failing to make debt payments.

    9、which of the following questions is false?
        a、sometimes management may believe that the securities they are issuing are priced at less than (or more than) their true value. if so, the npv of the transaction, which is the difference between the actual money raised and the true value of the securities sold, should not be included in the value of the project.
        b、an alternative method of incorporating financial distress and agency costs is to first value the project ignoring these costs, and then value the incremental cash flows associated with financial distress and agency problems separately.
        c、when the debt level—and, therefore, the probability of financial distress—is high, the expected free cash flow will be reduced by the expected costs associated with financial distress and agency problems.
        d、if the financing of the project involves an equity issue, and if management believes that the equity will sell at a price that is less than its true value, this mispricing is a cost of the project for the existing shareholders.

    10、iota industries is an all-equity firm with 50 million shares outstanding. iota has $200 million in cash and expects future free cash flows of $75 million per year. management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. iota's cost of capital is 10% and assume that capital markets are perfect. the value of iota if they use the $200 million to expand is closest to:
        a、$825 million
        b、$688 million
        c、$840 million
        d、$950 million

    final

    finals for corporate finance

    1、your great aunt matilda put some money in an account for you on the day you were born. this account pays 8% interest per year. on your 21st birthday the account balance was $5,033.83. the amount of money that your great aunt matilda originally put in the account is closest to:
        a、$600
        b、$800
        c、$1,000
        d、$1,200

    2、your great aunt matilda put some money in an account for you on the day you were born. this account pays 8% interest per year. on your 21st birthday the account balance was $5,033.83. the amount of money that would be in the account if you left the money there until your 65th birthday is closest to:
        a、$29,556
        b、$148,780
        c、$168,824
        d、$748,932

    3、if the risk-free rate of interest (rf) is 3.5%, then you should be indifferent between receiving $1000 in one-year or:
        a、$965.00 today.
        b、$966.18 today.
        c、$1000.00 today.
        d、$1035.00 today.

    4、which of the following statements is false?
        a、in general, the difference between the cost of capital and the irr is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
        b、the irr can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.
        c、if you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
        d、if the cost of capital estimate is more than the irr, the npv will be positive.

    5、consider two mutually exclusive projects a & b. if you subtract the cash flows of opportunity b from the cash flows of opportunity a, then you should:
        a、take opportunity a if the regular irr exceeds the cost of capital.
        b、take opportunity a if the incremental irr exceeds the cost of capital.
        c、take opportunity b if the regular irr exceeds the cost of capital.
        d、take opportunity b if the incremental irr exceeds the cost of capital.

    6、which of the following statements is false?
        a、many projects use a resource that the company already owns.
        b、when evaluating a capital budgeting decision, we generally include interest expense.
        c、only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project.
        d、as a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

    7、which of the following statements is false?
        a、sales will ultimately decline as the product nears obsolescence or faces increased competition.
        b、managers sometimes continue to invest in a project that has a negative npv because they have already invested a large amount in the project and feel that by not continuing it, the prior investment will wasted.
        c、with straight-line depreciation the asset's cost is divided equally over its life.
        d、a projects unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on an pre-tax basis.

    8、which of the following statements is false?
        a、leverage decreases the risk of the equity of a firm.
        b、because the cash flows of the debt and equity sum to the cash flows of the project, by the law of one price the combined values of debt and equity must be equal to the cash flows of the project.
        c、franco modigliani and merton miller argued that with perfect capital markets, the total value of a firm should not depend on its capital structure.
        d、it is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.

    9、consider the following equation: e d = u = a the u in this equation represents:
        a、the value of the firm's equity.
        b、the market value of the firm's assets.
        c、the value of the firm's unlevered equity.
        d、the value of the firm's debt.

    10、which of the following statements is false?
        a、an important consequence of leverage is the risk of bankruptcy.
        b、whether default occurs depends on the cash flows, not on the relative values of the firm's assets and liabilities.
        c、economic distress is a significant decline in the value of a firm's assets, whether or not it experiences financial distress due to leverage.
        d、modigliani and miller's results continue to hold in a perfect market even when debt is risky and the firm may default.

    11、which of the following statements is false?
        a、the u.s. bankruptcy code was created to organize this process so that creditors are treated fairly and the value of the assets is not needlessly destroyed.
        b、because the assets of the firm might be more valuable if kept together, creditors seizing assets in a piecemeal fashion might destroy much of the remaining value of the firm.
        c、debt holders can then take legal action against the firm to collect payment by seizing the firm’s assets.
        d、because most firms have multiple creditors, coordination makes it difficult to guarantee that each creditor will be treated fairly.

    12、which of the following methods are used in capital budgeting decisions?
        a、wacc method
        b、apv method
        c、fte method
        d、all of the above are used in capital budgeting decisions.

    13、which of the following statements is false?
        a、the wacc can be used throughout the firm as the company wide cost of capital for new investments that are of comparable risk to the rest of the firm and that will not alter the firm’s debt-equity ratio.
        b、a disadvantage of the wacc method is that you need to know how the firm's leverage policy is implemented to make the capital budgeting decision.
        c、the intuition for the wacc method is that the firm's weighted average cost of capital represents the average return the firm must pay to its investors (both debt and equity holders) on an after-tax basis.
        d、to be profitable, a project should generate an expected return of at least the firm's weighted average cost of capital.

    14、which of the following statements is false?
        a、the firm's unlevered cost of capital is equal to its pre-tax weighted average cost of capital–that is, using the pre-tax cost of debt, rd, rather than its after-tax cost, rd (1 - τc ).
        b、a firm's levered cost of capital is a weighted average of its equity and debt costs of capital.
        c、when the firm maintains a target leverage ratio, its future interest tax shields have similar risk to the project's cash flows, so they should be discounted at the project's unlevered cost of capital.
        d、the first step in the apv method is to calculate the value of free cash flows using the project's cost of capital if it were financed without leverage.

    15、which of the following statements is false?
        a、the apv approach explicitly values the market imperfections and therefore allows managers to measure their contribution to value.
        b、we need to know the debt level to compute the apv, but with a constant debt-equity ratio we need to know the project's value to compute the debt level.
        c、the wacc method is more complicated than the apv method because we must compute two separate valuations: the unlevered project and the interest tax shield.
        d、implementing the apv approach with a constant debt-equity ratio requires solving for the project's debt and value simultaneously.

    16、which of the following statements is false?
        a、if the debt-equity ratio changes over time, the risk of equity–and, therefore, its cost of capital–will change as well.
        b、the fte method can offer an advantage when calculating the value of equity for the entire firm, if the firm’s capital structure is complex and the market values of other securities in the firm’s capital structure are not known.
        c、the fte approach does not have the same disadvantage associated with the apv approach: we don't need to compute the project's debt capacity to determine interest and net borrowing before we can make the capital budgeting decision.
        d、the wacc and apv methods compute the firm's enterprise value, so that a separate valuation of the other components of the firm’s capital structure is needed to determine the value of equity.

    17、which of the following statements is false?
        a、in the real world, specific projects should differ only slightly from the average investment made by the firm.
        b、we can estimate ru for a new project by looking at single-division firms that have similar business risks.
        c、the project's equity cost of capital depends on its unlevered cost of capital, ru, and the debt-equity ratio of the incremental financing that will be put in place to support the project.
        d、projects may vary in the amount of leverage they will support–for example, acquisitions of real estate or capital equipment are often highly levered, whereas investments in intellectual property are not.

    18、which of the following statements is false?
        a、from an accounting perspective, dividends generally reduce the firm’s current (or accumulated) retained earnings.
        b、the way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy.
        c、most companies that pay dividends pay them semiannually.
        d、occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend.

    19、which of the following statements is false?
        a、in perfect capital markets, holding fixed the investment policy of a firm, the firm’s choice of dividend policy is irrelevant and does not affect the initial share price.
        b、in a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.
        c、in perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead.
        d、in perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. by reinvesting dividends or selling shares, they can replicate either payout method on their own.

    20、which of the following statements is false?
        a、unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares.
        b、if dividends are taxed at a higher rate than capital gains, which has been true until the most recent change to the tax code, shareholders will prefer share repurchases to dividends.
        c、shareholders typically must pay taxes on the dividends they receive. they must also pay capital gains taxes when they sell their shares.
        d、but because long-term investors can defer the capital gains tax until they sell, there is still a tax advantage for share repurchases over dividends.

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