1.Roger Harkel, CEO of Bestafer, Inc. seeks to raise $6.6 million in a private placement of equity in his early stage venture. Harkel conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. If the company has 1,000,000 shares outstanding before the private placement, what price per share should she agree to pay if her required rate of return is 50%? (Note: Assume investment is in standard preferred stock with no dividends and a conversion rate to common of 1:1.Round off to the nearest integer.)

$3/share

$7/share

$9/share

$11/share

$13/share

2.A commercial bank has fixed-rate long-term loans in its asset portfolio and variable-rate deposits in its liability portfolio. This commercial bank is exposed to an increase in interest rates. To protect against this interest rate risk, the bank could buy a swap, that is, take the fixed-payment side of a swap agreement.

True

False

3.Roger Harkel, CEO of Bestafer, Inc. seeks to raise $6.6 million in a private placement of equity in his early stage venture. Harkel conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. What share of the company will a venture capitalist require today if her required rate of return is 50%? ((Hint:Round off the decimal to the nearest integer)

15%

30%

50%

76%

89%

4.Roger Harkel, CEO of Bestafer, Inc. seeks to raise $4 million in a private placement of equity in his early stage venture. Harkel conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. Benedicta Jones of Gorsam Capital likes Harkels plan, but thinks it is nave in one respect: to recruit a senior management team, she believes Harkel will have to grant generous stock options in addition to the salaries projected in his business plan. From past experience, she thinks management should have the ability to own at least 15% share of the company by the end of year. Given her beliefs, what share of the company should Benedicta insist on today if her required rate of return is 50? (Hint:Round off the decimal to the nearest integer)

18%

36%

59%

89%

93%

5.A finance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed with $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. An insurance company has $50 million of auto loans with a fixed rate of 14 percent. The loans are financed with $50 million in CDs at a variable rate of LIBOR plus 4 percent.

Which of the following is correct?

I. The finance company (FC) is exposed to falling interest rates on the asset side of the balance sheet.

II. The FC wishes to convert the variable rate liabilities into fixed rate liabilities by swapping the variable rate payments for fixed rate payments.

III. The FC will make fixed rate payments and therefore is the buyer in the swap.

I only

II only

I and II only

I and III only

I, II, and III