Answer: b. Futures contracts generally trade on an organized exchange and are marked to market daily.
Question: Which of the following statements is most CORRECT?
Answer Options:
a. The acquiring firm’s required rate of return in most horizontal mergers will not be affected, because the two firms will have similar betas.
b. The goal of merger valuation is to value the target firm’s total capital at the target firm’s weighted average cost of capital because a firm is acquired from all of its investors—both shareholders and creditors.
c. The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.
d. In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
e. The primary rationale for most operating mergers is synergy.
Correct Answer: e
Answer:
Question: Companies HD and LD have identical amounts of assets, investor-supplied capital, operating income (EBIT), tax rates, and business risk. Company HD, however, has a higher debt ratio than LD. Company HD’s return on investors’ capital (ROIC) exceeds its after-tax cost of debt, rd(1 – T). Which of the following statements is CORRECT?
Answer Options:
a. Company HD has a higher return on assets (ROA) than Company LD.
b. Company HD has a higher times interest earned (TIE) ratio than Company LD.
c. Company HD has a higher return on equity (ROE) than Company LD, and its risk as measured by the standard deviation of ROE is also higher than LD’s.
d. The two companies have the same ROE.
e. Company HD’s ROE would be higher if it had no debt.
Correct Answer: c
Answer:
Question: Which of the following statements is most CORRECT?
Answer Options:
a. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
b. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
c. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
d. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what’s probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm’s value.
e. Research of U.S. firms suggests that managers’ personal motivations have had little, if any, impact on firms’ decisions to merge.
Correct Answer: d
Answer:
Question: The Modigliani and Miller (MM) articles implicitly assumed that bankruptcy did not exist. That led to the development of the “trade-off” model, where the firm’s value first rises with the use of debt due to the tax shelter of debt, but later falls as more debt is added because the potential costs of bankruptcy begin to more than offset the tax shelter benefits. Under the trade-off theory, an optimal capital structure exists.
Answer Options:
a. True
b. False
Answer: a. True
Question: A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Other things held constant, the lower a firm’s tax rate, the more logical it is for the firm to use debt.
Answer Options:
a. True
b. False
Answer: b. False
Question: One objective of risk management can be to reduce the volatility of a firm’s cash flows.
Answer Options:
a. True
b. False
Answer: a. True
Question: Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Which of the following statements is CORRECT?
Answer Options:
a. The capital structure that maximizes the stock price is also the capital structure that minimizes the cost of equity from retained earnings (rs).
b. The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
c. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm’s times interest earned (TIE) ratio.
d. If a company increases its debt ratio, this will typically increase the marginal costs of both debt and equity, but it still may reduce the company’s WACC.
e. If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
Correct Answer: d
Answer: