Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates? a. Buying inverse floaters. b. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates. c. Purchase principal only (PO) strips that decline in value whenever interest rates rise. d. Enter into a short hedge where the bank agrees to sell interest rate futures. e. Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.
Answer: d. Enter into a short hedge where the bank agrees to sell interest rate futures.
Question: Heavy use of off-balance-sheet lease financing will tend to
Answer Options:
a. make a company appear more risky than it actually is because its stated debt ratio will be increased.
b. make a company appear less risky than it actually is because its stated debt ratio will appear lower.
c. affect a company’s cash flows but not its degree of risk.
d. have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
e. affect the lessee’s cash flows but only due to tax effects.
Correct Answer: b
Answer:
Question: Which of the following actions does NOT help managers defend against a hostile takeover?
Answer Options:
a. Establishing a poison pill provision.
b. Granting lucrative golden parachutes to senior managers.
c. Establishing a super-majority provision in the company’s bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%.
d. Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm’s financial position.
e. Finding a “white squire” that will buy enough of the target firm’s shares to block the hostile takeover.
Correct Answer: d
Answer:
Question: The Miller model begins with the Modigliani and Miller (MM) model without corporate taxes and then adds personal taxes.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
Answer Options:
a. An increase in the corporate tax rate.
b. An increase in the personal tax rate.
c. An increase in the company’s operating leverage.
d. The Federal Reserve tightens interest rates in an effort to fight inflation.
e. The company’s stock price hits a new high.
Correct Answer: a
Answer:
Question: Which one of the following statements is most CORRECT? a. Real options change the size, but not the risk, of projects’ expected NPVs. b. Real options change the risk, but not the size, of projects’ expected NPVs. c. Real options can reduce the cost of capital that should be used to discount a project’s expected cash flows. d. Very few projects actually have real options. They are theoretically interesting but of little practical importance. e. Real options are more valuable when there is very little uncertainty about the true values of future sales and costs.
Answer: c. Real options can reduce the cost of capital that should be used to discount a project’s expected cash flows.
Question: The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Leveraged buyouts (LBOs) occur when a firm’s managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)
Answer Options:
a. Call option.
b. Put option.
c. Out-of-the-money option.
d. Naked option.
e. Covered option.
Answer: a. Call option
Question: Financial risk refers to the extra risk borne by stockholders as a result of a firm’s use of debt as compared with their risk if the firm had used no debt.
Answer Options:
a. True
b. False
Answer: a. True
Question: Deeble Construction Co.’s stock is trading at $30 a share. There are also call options on the company’s stock, some with an exercise price of $25 and some with an exercise price of $35. All options expire in 3 months. Which of the following best describes the value of these options?
Answer Options:
a. If Deeble’s stock price rose by $5, the exercise value of the options with the $25 exercise price would also increase by $5.
b. The options with the $25 exercise price will sell for less than the options with the $35 exercise price.
Answer: a. If Deeble’s stock price rose by $5, the exercise value of the options with the $25 exercise price would also increase by $5.
Question: When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
Answer Options:
a. True
b. False
Answer: a. True
Question: Your firm has $500 million of investor-supplied capital, its return on investors’ capital (ROIC) is 15%, and it currently has no debt in its capital structure (i.e., wd = 0). The CFO is contemplating a recapitalization where it would issue debt at an after-tax cost of 10% and use the proceeds to buy back some of its common stock, such that the percentage of common equity in the capital structure (we) is 1 – wd. If the company goes ahead with the recapitalization, its operating income, the size of the firm (i.e., total assets), total investor-supplied capital, and tax rate would remain unchanged. Which of the
Answer Options:
a. Your firm’s ROIC will increase, which would typically be reflected in the stock price.
b. The firm’s earnings per share (EPS) would decline, assuming the firm has positive net income.
c. The firm’s WACC should decline, which will likely lead to a higher stock valuation.
d. The percentage of equity in the firm’s capital structure will decrease.
e. The firm’s stock price should remain unchanged because its ROIC will remain at 15%, and its WACC will remain unchanged.
Answer: d
Question: Which of the following is most CORRECT?
Answer Options:
a. Firms that use “off-balance-sheet” financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.
b. Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.
c. The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
d. Capital, or financial, leases generally provide for maintenance by the lessor.
Correct Answer: a
Answer:
Question: Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)
Answer Options:
a. Call option.
b. Put option.
c. Out-of-the-money option.
d. Naked option.
e. Covered option.
Answer: b. Put option
Question: A firm’s business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.
Answer Options:
a. True
b. False
Answer: b. False
Question: Only if a target firm’s value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Which of the following statements is most CORRECT?
Answer Options:
a. If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.
b. True
c. False
Correct Answer: c
Answer: