1-Which of the following statements if FALSE?

a. Firms with regular dividends are often reluctant to cut dividends due to adverse investor reactions. As a result, firms with temporary excess cash should use special dividends or share repurchases to return cash to shareholders rather than regular dividends

b. Equity repurchases can help insiders increase their control of a firm

c. Managers that receive equity options as part of their compensation may prefer share repurchases to dividends

d. If dividends are taxed at higher rates than capital gains, then shareholders will prefer buybacks to dividends

e. By definition, share repurchases can only benefit shareholders whose shares are actually repurchased. The remaining shareholders will be neither better nor worse off

2-Consider the following statements:

i. If regulations limiting banks leverage increase the tax a bank must pay, this must increase their cost of capital.

ii. If Modigliani & Millers assumptions of perfect capital markets hold, then increasing a banks leverage will not increase its cost of debt.

iii. If regulations limiting a banks leverage increase its cost of capital, then this regulation will be bad for society.

iv. If Modigliani and Millers assumptions of perfect capital markets do not hold, then policies that change a banks capital structure will not affect its investment decisions.

Which are correct?

a. (iii) and (iv)

b. None of the statements (i) to (iv) are correct

c. (iii)

d. (iv)

3-Consider two firms that generate the same stream of operating profits and differ only in their capital structure. Firm A is financed 40% by debt and 60% by equity. Firm B is financed 50% by debt and 50% by equity. Both firms can borrow at the same risk-free interest rate. They have each committed to pay whatever is left over of profits after

interest payments to shareholders.

An investor would like to buy 20% of firm As debt and 40% of its

equity. However, they are banned from buying firm As debt or equity.

Which investments in firm Bs debt and equity would generate the same payoff?

a. Buy 20% of its debt and 40% of its equity

b. Buy 16% of its debt and 20% of its equity

c. Buy 20% of its debt and 20% of its equity

d. Buy 24% of its debt and 40% of its equity

e-None of the above

4-Boxer is a firm thats in trouble. It has debts of 800 due at the end of the year, and if it doesnt change strategy, its value will only be 750. The risk-free rate is 5%. It is considering two projects. The first, Project Safe, offers a risk-free return of 80% but would require an up-front investment of 100, which must be made by shareholders. The second, Project Risky, requires no initial investment and has 50% chance of success. If it fails, the firm will be worth 500, whilst if it succeeds it will be worth 810. Which of the following is TRUE?

a. The firm is suffering from debt overhang: shareholders will not be willing to invest in Project Safe because part of the return will accrue to debtholders

b. Shareholders would be happy to proceed with either project rather than do nothing

c. Bondholders would prefer Project Risky to doing nothing, as this decreases the probability of default

d. Shareholders and debtholders would both benefit from Project Risky

e. None of the above