QUESTION 31

1. Firm WHOA is a one-year firm that produces a single cash flow next year. In the good state, the assets produce $40M and in the bad state the assets produce $18M. The two states are equally likely. The firm owes $20M in debt next year and has no other debt outstanding. If the firm defaults, it must pay $2M in legal fees and other bankruptcy costs. The firm has an asset beta of 0.95 and a debt beta of 0.10. Assume a risk free rate of 3 percent, the market risk premium is 8 percent, and that there are 2M shares outstanding.

What is the value of WHOA?

A. 26.22

B. 25.32

C. 264.15

QUESTION 32

1. Firm WHOA is a one-year firm that produces a single cash flow next year. In the good state, the assets produce $40M and in the bad state the assets produce $18M. The two states are equally likely. The firm owes $20M in debt next year and has no other debt outstanding. If the firm defaults, it must pay $2M in legal fees and other bankruptcy costs. The firm has an asset beta of 0.95 and a debt beta of 0.10. Assume a risk free rate of 3 percent, the market risk premium is 8 percent, and that there are 2M shares outstanding.

What is the value WHOA's debt?

A. 18.30M

B, 20M

C. 17.34M

QUESTION 33

1. Firm WHOA is a one-year firm that produces a single cash flow next year. In the good state, the assets produce $40M and in the bad state the assets produce $18M. The two states are equally likely. The firm owes $20M in debt next year and has no other debt outstanding. If the firm defaults, it must pay $2M in legal fees and other bankruptcy costs. The firm has an asset beta of 0.95 and a debt beta of 0.10. Assume a risk free rate of 3 percent, the market risk premium is 8 percent, and that there are 2M shares outstanding.

What is WHOA's current stock price?

A. 3.99

B. 8.00

C. 12.66

QUESTION 34

1. In the real world when a company announces that it will issue stock, the stock price ___ , because___ .

A. rises by 2 to 4 percent, the announcement signals that the stock is undervalued

B. declines by 2 to 4 percent, the announcement signals that the stock is overvalued

C. stays the same, the announcement is not credible