1. Value of anything is *

1. The value of al possible future cash
2. flows/returns
3. Risk adjusted total value of all
4. future cash flows

2. Required rate of return of a stock is known as *

1. Dividend payout rate
2. Retention Ratio
3. Discount Rate
4. Value

Ans-c

3. We commonly consider all of the following to be factors that the market is overvalued except: *

a) high average price-to-book ratio.

b) high average ratio of stock prices to corporate sales.

c) high average dividend yield.

d) high average P/E ratio.

D) maybe

4. Capital Structure means *

1. Long-term debt, preferred stock, and common stock equity.
2. current assets and current liabilities.
3. total assets minus liabilities.
4. shareholders' equity.

5. The traditional approach towards the valuation of a company assumes: *

1. that the overall capitalization rate holds constant with changes in financial leverage.
2. that there is an optimum capital structure.
3. that total risk is not altered by changes in the capital structure.
4. that markets are perfect.

6. Cost of capital for a firm -- when we allow for taxes, bankruptcy, and agency cost *

1. remains constant with increasing levels of financial leverage.
2. first declines and then ultimately rises with increasing levels of financial leverage
3. increases with increasing levels of financial leverage.
4. decreases with increasing levels of financial leverage.

7. According to the M&M Theory if there are no taxes, firms are indifferent concerning the method of financing.

1. taking taxes into consideration, firms should maximize the use of debt.
2. taking taxes into consideration, firms should maximize the use of equity.
3. both a and b
4. both a and c Cafes

8.Richard production volume is 250,000 units while the company's variable costs are $9 per unit and the fixed costs are $700,000. What must Jon's Bikes selling price be if he just wants to breakeven?

1. 11.8
2. 10.89
3. 8.26
4. 5.63

9. Which of the following statement is false about Equity share capital: *

1. Its a source of permanent capital
2. Equity shareholders undertake the highest amount of risk
3. Equity shareholders are practically owners
4. The cost of ordinary shares is usually higher than that of debt

10. The unlevered cost of capital is:

1. the cost of capital for a firm with no equity in its capital structure.
2. the cost of capital for a firm with no debt in its capital structure.
3. the interest tax shield times pretax net income.
4. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure. equal to the profit margin for a firm with some debt in its capital structure

11. What will be the price of a share of a company with 5 million USD in balance sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4 (hint: calculate book value of equity first)

1. 2.5
2. 40
3. 10 50

12. Assuming perpetual cash flows in Proposition I (No Tax), what is the value of Unlevered firm with EBIT = $50 million, Tax rate = 40%, cost of debt = 9%, and unlevered cost of capital = 12%? a. $250 million

b. $9 million

c. $40 million

d. $290 million

13. The optimal capital structure when the firm pays corporate taxes, but no bankruptcy cost is?

a)100% equity

b) Almost 100% Debt 50% Debt and 50% Equity at D/E ratio where WACC is lowest

c) Cannot be determined

c) Grub Burger has decided to split their current outstanding shares to boost stock liquidity in a 3:1 split.

d) Meaning each stock will be split into 3 stocks. After the split the number of commons tock outstanding for Grub is 90,000 shares.

14. What was Grubs total Common Stock outstanding before the split?

1. 30,000
2. 3000
3. 90,000
4. 270,000

15. At what point, the value of the firm will start to decrease and the WACC will start to increase as more debt is added?

1. The additional value of the interest tax shield will be offset by the increase in expected bankruptcy cost
2. The increase in expected bankruptcy cost will be offset by the additional value of the interest tax shield
3. Cost of equity capital starts going up due to more leverage
4. Cost of debt goes up due to more debt

16. Which of the following Statement is False?

1. The issuing of shares to raise finance can be expensive
2. Borrowing can increase the risk that a company faces
3. In cash terms, Retained profits represent a free source of funds
4. Retained profits is the only source of business funds in the short run

17. What is the PV of the interest tax-shield of if the current market value of the firm is $12 million, its value if unlevered would be $9 million, and the present value of bankruptcy and agency costs is $1 million?(consider a world with tax and bankruptcy, agency costs) * 2 points

1. 2 M
2. 2.5 M
3. 1.5 M
4. 4 M

18. Two identical firms exist except that Firm A uses no debt and Firm B uses some debt. The total value of Firm A is less than the total value of Firm B, but you own 2% of Firm B. Based on the arguments by Modigliani and Miller regarding the total value principle, what should you do?

A) Buy 2% of Firm A with funds from "shorting" your shares in Firm

B. Submit a press release that the two firms should be worth identical values. This will cause Firm A to rise in value and leave you extra funds for investment.

c) You should borrow enough funds to equal the difference in firm value, purchase shares of Firm A with these funds, and sell your shares in Firm B.

d) This will leave extra funds for an investment of your choice. Sell your shares, personally borrow 2% of the quantity of firm debt, and purchase 2% of Firm A. This will leave extra funds for an investment of your choice.

e) Sell enough of your shares (Firm to purchase 2% of Firm A. This will leave extra funds for an investment of your choice.

19. If bankruptcy costs and an increasing probability of bankruptcy increases with financial leverage, we can expect ________ than would be the case (without bankruptcy costs).

1. the premium for business risk to be higher
2. the premium for business risk to be lower
3. the premium for financial risk should rise by less
4. the premium for financial risk should rise by more

20. As the amount of ________ increases the present value of ________

1. debt; net tax-shield benefits of debt increases
2. common equity; bankruptcy and agency costs increase
3. debt; net tax-shield benefits of debt decrease
4. common equity; net tax-shield benefits of debt decrease.

21. If my carrying value is more than my salvage value then which of the following statements is/are false ?

1. I will have a gain on sale
2. I will have to pay some gain tax
3. My after tax salvage will be equal to my salvage value
4. all of the above 1 & 2 only

22. The perpetual growth rate has is an increasing function of the terminal value * 1 point True False Which of the following is false for enterprise value ?

1. Higher cash balance of the the company that is being sold will decrease the price an investor has to pay if he or she is willing to purchase that business
2. High cash balance of the investing company will decrease price of the company that is being sold
3. Debt of company increase its enterprise value
4. A spike in share per price will increase enterprise value

23.Intrinsic value changes based on?

1. Market perception of the company
2. Perpetual growth potential of the company
3. Inherent potential of assets and operations
4. 2 & 3 All of the above

24. When we adjust a future cash flow with calculated risk, we essentially ?

1. try to figure out whether the cash flow is (inflow) is higher than the outflow (capital cost)
2. Trying to figure out what the cash flow is worth today adjust the cash flow with inflation only to see what its worth at present
3. all the above
4. 1 & 2 only

25. What is the relationship between sales and owners equity value ?

1. Negative
2. Positive
3. neutral
4. not enough information given