A firm's capital structure is the mix of financial securities used to finance its activities and can include all of the following except,

bonds.

preferred stock.

common stock.

equity options.

M&M Proposition 2 states that the cost of a firm's common stock is directly related to

the required rate of return on the firm's underlying assets.

the debt-to-equity ratio.

the return of the market index.

both the debt-to-equity ratio and the required rate of return on the firm's underlying assets.

Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. How much is Dynamo worth today?

$1,765

$1,500

$2,143

None of the above

Cadmium Electronics Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm's cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC?

10.4%

8.4%

9.2%

9.6%

Gangland Water Guns, Inc. has a debt-to-equity ratio of 0.5. If the firm's cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC?

9%

10%

11%

None of the above.

Gangland Water Guns, Inc. has a debt-to-equity ratio of 0.5. If the firm's cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC?

9%

10%

11%

None of the above.

The use of debt financing

reduces agency costs between the stockholders and management by increasing the amount of risk the managers take.

increases agency costs between the stockholders and management by limiting the amount of risk the managers take.

increases agency costs since managers prefer to keep more retained earnings rather than paying dividend.

both increases agency costs between the stockholders and management by limiting the amount of risk the managers take and increases agency costs since managers prefer to keep more retained earnings rather than paying dividend.

The asset substitution problem occurs when

managers substitute less risky assets for more risky ones to the detriment of bondholders.

managers substitute more risky assets for less risky ones to the detriment of bondholders.

managers substitute more risky assets for less risky ones to the detriment of equity holders.

managers substitute less risky assets for riskier ones to the detriment of equity holders.

Packman Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. The firm borrows $2,000, and its coupon rate is 8%. If the company's marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings?

$238

$272

$259

None of the above

Which of the following supports the trade-off theory of capital structure?

Both firms use cash on hand first, since issuing equity and debt is expensive and a firm's capital structure is the result of past equity and debt issuance decisions.

A firm's capital structure is the result of past equity and debt issuance decisions.

Firms have a target capital structure.

Firms use cash on hand first, since issuing equity and debt is expensive.

Which of the following statements is true of S-corporation?

An S-corporation can have more than 100 stockholders.

Only foreign investors can own the shares of an S-corporation.

All profits of an S-corporation pass directly to the stockholders as they would pass to the partners in a partnership.

An S-corporation is a variation of the LLC (limited liability company).

Which of the following statements is true about business plans?

A well-prepared business plan makes it easier for an entrepreneur to communicate to potential investors precisely what returns an investor might expect to receive.

A well-prepared business plan always avoids contingent liabilities as the plan helps to predict and change the occurrence of a contingent liability.

A business plan is useful only in case of exigency in the business environment otherwise a business plan is not important.

A business plan is a trivial part in the overall strategy formulation and its impact on business operations in the long run is miniscule.

Warning

Which of the following statements is true of business valuation principle?

The value of a business is solely affected by managers financing decisions.

The fair market value of a business is the value of that business to a hypothetical person who is knowledgeable about the business.

Estimating the fair market value of a business includes the value of synergies or the effects of any investor-specific management style.

As per first valuation principle, the value of business does not change over time.

When using the multiples analysis approach to valuing a business, one must be aware:

of the presence of a marketability discount that can be sizable.

of the presence of a marketability premium that can be sizable.

of the stock value of similar companies whose shares are not publicly traded.

of the adjusted book value of a business which is the cost of duplicating the assets of the business in their present form as of the valuation date.

The transaction approach is difficult to use because:

the terms of the transactions can be easy to assess.

the terms of the transactions can be difficult to assess.

transactions involving the purchase or sale of an entire business in an industry tend to occur frequently and hence the amount of data is immense.

transactions data are typically as reliable as the data available for multiples analysis, especially when they are associated with a private firm.

Which of the following statements about the free cash flow from the firm (FCFF) approach is true?

The total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm's weighted average cost of capital,WACC.

The present value of these cash flows exceeds the total value of the firm, or its enterprise value.

We include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses.

The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, are added in the calculation of FCFF.

Sonicmony Soft, makes designer gold bracelets. Its annual costs include shop rent of $15,000, salaries for two jewelers of $125,000, design software costs of $12,000, and other overhead costs of $15,000. An average bracelet is priced at $6,500. It costs $2,200 in raw material, $1,500 in labor, and $400 in other expenses. What is the minimum number of bracelets that need to be sold to earn a profit? (Round to nearest whole unit.)

70 bracelets

14 bracelets

18 bracelets

47 bracelets

Settetocol, Inc., has cash of $12,000, receivables of $35,000, and inventory of $28,000. In addition, the firm has fixed assets of $120,000. Management has also told you that you can reasonably expect to collect 93 percent of the receivables, that the inventory could be sold to realize 84 percent of its book value, and that the sale of the property, plant, and equipment would yield $94,000. What is the liquidation value of this company? (Round to the nearest dollar.)

$162,070

$174,866

$139,695

$138,695

Cervil had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Cervil has an enterprise value/EBITDA multiple of 5.40. What is the enterprise value of Cervil? (Round to the nearest million dollars.)

$1,334 million

$453 million

$1,787 million

$1,315 million

Alfred Sautin wants to invest in Dieciring, Inc., a private company. Based on earnings multiples of similar publicly traded firms, Alfred estimates the value of the private company's stock to be $19 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 11 percent. He estimates the marketability discount for such a firm to be 14 percent. The discount for the key person, one of the founders who may leave the firm upon Alfred's control of the firm, is 16 percent. What price should he be willing to pay for these shares? (Round final answer to two decimal places.)

$14.05 per share

$20.70 per share

$15.24 per share

$18.10 per share

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