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1) Which of the following statements is FALSE? 1. When a companys borrowing to finance a project is set according to a predetermined schedule, the

1) Which of the following statements is FALSE?

1. When a companys borrowing to finance a project is set according to a predetermined schedule, the interest tax shields on this debt should be discounted using the unlevered cost of capital.

2. With a constant interest coverage policy, the value of the interest tax shield is proportional to the project's levered value.

3. A target leverage ratio means that the firm adjusts its debt proportionally to the projects market value.

4. Debentures usually contain clauses restricting the company from issuing new debt with equal priority to existing debt.

A) Statement 1. B) Statement 2. C) Statements 1 and 3. D) Statements 1 and 2.

2) Which of the following is an IPO puzzle?

A) On average, IPOs appear to be overvalued.

B) New public companies perform worse than the market over the long run.

C) The fee percentage charged by underwriters is sensitive to issue size.

D) Economic conditions fully explain the time-series fluctuations in the number of IPOs.

3) Which of the following statements is FALSE?

1. In the flow-to-equity valuation method, the projects free cash flows are discounted using the equity cost of capital.

2. When a firm has permanent debt, the cost of debt is not required to calculate the present value of the interest tax shield.

3. Eurodollar bonds are issued by foreign (non-U.S.) companies in the U.S. bond market.

4. Private companies usually issue preferred stock when they sell equity for the first time to outside investors.

A) Statement 3. B) Statement 2 and 3. C) Statements 1 and 3. D) Statements 2 and 4.

4) Which of the following about foreign corporate bonds is TRUE?

A) They are denominated in the currency of the borrowers country.

B) They are issued and traded in countries other than the country in which the bonds currency is denominated.

C) They are aimed for investors from the same country as the borrower.

D) A bond issued by non-British companies seeking to raise capital in pound-sterling from British investors is an example of a foreign corporate bond.

5) When a holder of a ________ exercises it and purchases stock, this dilutes the ownership of existing shareholders.

A) call option. B) callable bond. C) warrant. D) preferred option.

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