FIN 540 Midterm Exam 100% Correct Answers

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FIN 540 Midterm Exam

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 NOTCORRECT?Answer :

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 theAnswer :

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 includeAnswer :

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’sAnswer :

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 includeAnswer :

Question 18

In the lease versus buy decision, leasing is often preferableAnswer :

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?Answer :

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 :