Which one of the following is not a typical characteristic of a leveraged buyout target?

A. Low debt levels

B. Concentrated ownership (large shareholders)

CPotential for gains from restructuring

D. Large cash flows that can be used to service the debt

Last year, company Z invested 10m to develop a new software. However, all of its customers have now switched to a different operative system that is incompatible with Z's software. It is estimated that upgrading the software to make it compatible will cost 5m. The company should upgrade the software if the present value of the future stream of cash flows generated by the project is larger than (in m)

A.15(1+r)

B10(1+r)

C. 10(1+r)+5

D5

Consider the following two situations

AAn investor considering whether to buy a firms bond is unable to assess the risk associated with the firm's existing projects

BA market maker is unable to observe whether its counterparty is an insider or not

The nature of the asymmetric information problem in situations A and B can be described as

1. Adverse selection in both cases

BMoral hazard in both cases

C. Adverse selection in case A. and moral hazard in case B.

DMoral hazard in case A. and adverse selection in case B.

An increase in the amount of goods held in inventory

A. Implies a reduction in working capital and should be accordingly considered as a positive cash flow

BCan be seen as a sunk cost and therefore should not be considered when calculating the projects cash flows

CImplies an increase in working capital and should be accordingly considered as a negative cash flow

D. Reduces the opportunity cost of a project

Firm X has generated average annual profits of Y>0 over the last 10 years. In the same period, the firm has not paid any dividend (all earnings have been retained) and its debt has been constant at D>0. The firms business model and its market environment have also stayed roughly the same during the 10 year period. This implies that

A. Xs debt to equity ratio is the same as it was 10 years ago

B. The beta of firm Xs larger than it was 10 years ago

CThe beta of firm Xs equity is the same as it was 10 years ago

DThe beta of firm Xs equity is smaller than it was 10 years ago

Last year firm X was only undertaking projects with an IRR larger than 10%. This year the firm has decided to increase the hurdle rate to 12%. This decision can be justified

A. On the grounds that the risk free rate has decreased

B. On the grounds that the risk premium was previously underestimated

C. On the grounds that the new projects are expected to have a lower beta than the firm as a whole

DOn the grounds that the firms beta was previously overestimated