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Which of the following statements are true? 1) Bird in the hand hypothesis of dividends suggests that investors prefer certain dividends now to uncertain gains

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribed Which of the following statements are true? 1) Bird in the hand hypothesis of dividends suggests that investors prefer certain dividends now to uncertain gains later. 2) Clientele hypothesis of dividends suggests that different investors prefer different stocks with respect to dividend payout levels. 3) All companies in all tax systems should pay the lowest dividend they can get away with. 4) Modigliani and Miller (1961) dividend irrelevance theorem suggest that dividend policy is not important to investors. A. 2 and 4 B. 1 and 2 C. 1,2 and 4 D. 1,2,3, and 4 Question 22 Which of the following announcements are likely to lead to an increase in share price? 1) Increase in leverage 2) Increase in dividend 3) Merger - target company 4) Merger - acquiring company A. 1 and 2 B. 1,2 and 3 Which of the following announcements are likely to lead to an increase in share price? 1) Equity issue 2) Debt issue 3) Share repurchases 4) Less than expected earnings per share A. 2 only B. 2 and 3 C. 1,2 and 3 D. 2,3 and 4 Question 24 A company wishes to borrow 6.4 million to invest in a project. There is a 55% probability that the project will result in a net cash inflow of 8 million and a 45% probability that the project will result in a net cash inflow of 2.4 million. The company's only activity is the project. Assuming a 7\% discount rate, how much will the company have to repay in the favourable state for a bank to be willing to make the loan? A. 12.45 million B. 12.68 million C. 11.63 million D. 14 million Question 25 Assume the cash flows arising from a project are the only potential source of cash flow for a company and the company currently owes 0.7 million debt at an interest rate of 15% per annum. In one year's time, the project will either yield a cash inflow of 1.4 million with a probability of 30% or a cash inflow of 3.5 million with a probability of 70%. In one year's time, the company will be closed and the proceeds distributed to shareholders. What is the expected cash inflow for shareholders in one year's time? A. 0.88 million B. 1.98 million C. 2.07 million D. 3.1 million For which type of firms is financial distress especially costly? 1) Firms whose product quality is not an important factor. 2) Firms whose employees require specialized training. 3) Firms with high leverage. 4) Firms whose products require a follow-up service. Which of the following are examples of potential conflict (agency problem) between managers and shareholders? 1) Merging with companies in other industries to diversify risk. 2) Merging with companies in the same industry to generate synergies. 3) The level of debt financing. 4) Spending on corporate perquisites (i.e. purchase of a new corporate jet). A. 1 and 3 B. 1 and 4 C. 2 and 4 D. 1,3 and 4 Question 28 A company for which financial distress is likely may have difficulty 1) Selling to customers who require a low price but are not too concerned about quality. 2) Selling products which require after-service. 3) Encouraging employees to undergo a specialized skills training for the purposes of working on company's unique projects. 4) Requiring employees to undergo training which will equip the employees with skills which are marketable to other companies. A. 2 only B. 3 only C. 2 and 3 D. 1,2 and 4 Question 29 Two firms, U and L, are identical in every respect except for their capital structures. Company U is all-equity financed, whereas L is partly funded by debt. The market value of U's equity is 5 million and the total market value of L's debt is 2.5 million. The corporate tax rate is 20%. If all the assumptions of 'Modigliani and Miller Theorem with Taxes (1961)' apply, which of the following is the market value of L's equity? A. 3.5 B. 6 C. 4.5 D. 7 Which of the following are assumptions of the Modigliani and Miller Capital Structure Irrelevance Theorem (1958)? 1) There are no transaction costs. 2) Financing policy does not impact on the firm's cash flows. 3) Investors and corporate insiders share the same information. 4) Homogenous expectations. A. 4 only B. 1,2 and 3 C. 1 and 3 D. 1 and 2

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