The document appears to be an exam for a finance course consisting of multiple choice questions covering various finance topics. It includes 20 questions testing concepts such as the MM extension with growth, private placements, net advantage of leasing, purchasing power parity, residual dividend policy, bond pricing, effects of recapitalization, bankruptcy law, foreign exchange rates, mergers and acquisitions, option types, and swaps. The questions require understanding and application of key principles in these areas of corporate finance.

1. FIN 516 Week 8 Final
Exam/FIN516
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FIN 516 Week 8 Final Exam
Question 1.1. (TCO B) Which of the following statements concerning the MM extension with growth is not correct?
(a) The tax shields should be discounted atthe unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constanttax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered costof equity under MM’s original (with tax)
assumptions.
(d) For a given D/S, the WACC is greater than the WACC under MM’s original (with tax) assumptions.
(e) The total value of the firm is independentofthe amountofdebt it uses.
Question 2.2. (TCO D) Which of the following statements is mostcorrect?
(a) In a private placement,securities are sold to private (individual) investors rather than to institutions.
(b) Private placements occur mostfrequentlywith stocks,but bonds can also be sold in a private placement.
(c) Private placements are convenientfor issuers,butthe convenience is offsetby higher flotation costs.
(d) The SEC requires thatall private placements be handled bya registered investmentbanker.
(e) Private placements can generallybring in funds faster than is the case with public offerings.(Points : 20)
Question 3.3. (TCO E) Buster’s Beverages is negotiating a lease on a new piece of equipmentthatwould cost
$100,000 if purchased.The equipmentfalls into the MACRS 3-year class,and it would be used for 3 years and then
sold,because the firm plans to move to a new facility at that time.The estimated value of the equipmentafter 3 years
is $30,000.If the borrow and purchase option is used,the cash flows would be the following:(Year 1) -2,400; (Year 2)
-3,800; (Year 3) -1,400; (Year 4) -79,600;all of these cash outflows would be atthe beginning ofthe respective years.
Alternatively, the firm could lease the equipmentfor 3 years, with annual lease payments of$29,000 per year,
payable at the beginning ofeach year. The firm is in the 20% tax bracket. If it borrows and purchases,itcould obtain
a 3-year simple interestloan,to purchase the equipmentata before-tax interestrate of 10%. If there is a positive net
advantage to leasing,the firm will lease the equipment.Otherwise,itwill buy it. What is the NAL?
(a) $5,736
(b) $6,023
(c) $6,324
(d) $6,640
(e) $6,972 (Points : 20)

2. Question 4.4. (TCO I) Suppose hockeyskates sell in Canada for 105 Canadian dollars,and 1 Canadian dollar equals
0.71 U.S. dollars.If purchasing power parity(PPP) holds,whatis the price of hockey skates in the United States?
(a) $14.79
(b) $63.00
(c) $74.55
(d) $85.88
(e) $147.88 (Points : 20)
Page 2
Question 1.1. (TCO C) Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual
dividend policy and also maintains its targetcapital structure,whatwill its payout ratio be?
EBIT $2,000,000
Capital budget$850,000
Interestrate 10%
% Debt 40%
Debt outstanding $5,000,000
% Equity 60%
Shares outstanding $5,000,000
Tax rate 40%
(a) 37.2%
(b) 39.1%
(c) 41.2%
(d) 43.3%
(e) 45.5% (Points : 20)
Question 2.2. (TCO F) Warren Corporation’s stock sells for $42 per share.The companywants to sell some 20-year,
annual interest,$1,000 par value bonds.Each bond would have 75 warrants attached to it, each exercisable into one
share of stock at an exercise price of $47. The firm’s straightbonds yield 10%.Each warrantis expected to have a
marketvalue of $2.00 given that the stock sells for $42.What coupon interestrate mustthe companyset on the
bonds in order to sell the bonds-with-warrants atpar?
(a) 7.83%
(b) 8.24%
(c) 8.65%
(d) 9.08%
(e) 9.54% (Points : 20)
Question 3.3. (TCO B) Reynolds Resorts is currently100% equity financed.The CFO is considering a recapitalization
plan under which the firm would issue long-term debtwith a yield of 9% and use the proceeds to repurchase common
stock. The recapitalization would notchange the company’s total assets,nor would itaffect the firm’s basic earning
power,which is currently 15%.The CFO believes that this recapitalization would reduce the WACC and increase
stock price. Which of the following would also be likelyto occur if the companygoes ahead with the recapitalization
plan?
(a) The company’s netincome would increase.
(b) The company’s earnings per share would decline.
(c) The company’s costof equity would increase.
(d) The company’s ROA would increase.
(e) The company’s ROE would decline.(Points : 20)

3. Question 4.4. (TCO G) Which of the following statements is mostcorrect?
(a) Our bankruptcy laws were enacted in the 1800s,revised in the 1930s,and have remained unaltered since that
time.
(b) Federal bankruptcy law deals only with corporate bankruptcies.Municipal and personal bankruptcyare governed
solelyby state laws.
(c) All bankruptcy petitions are filed by creditors seeking to protect their claims againstfirms in financial distress.
Thus,all bankruptcy petitions are involuntary as viewed from the perspective of the firm’s management.
(d) Chapters 11 and 7 are the mostimportantbankruptcychapters for financial managementpurposes.Ifa
reorganization plan cannotbe worked out under Chapter 11, then the companywill be liquidated as prescribed in
Chapter 7 of the Act.
(e) Restructuring a firm’s debtcan involve forgiving a certain portion of the debt, but it cannotcall for changing the
debt’s maturityor its contractual interestrate. (Points : 20)
Page 3
Question 1.1. (TCO I) In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200.If the car
still sold for the same amountofyen today but the current exchange rate is 144 yen per dollar,what would the car be
selling for today in U.S. dollars?
(a) $5.964
(b) $8,200
(c) $10,250
(d) $12,628
(e) $13,525 (Points : 20)
Question 2.2. (TCO H) Which of the following statements is mostcorrect?
(a) The acquiring firm’s required rate of return in mosthorizontal mergers will notbe affected, because the two firms
will have similar betas.
(b) Financial theory says that the choice of how to pay for a merger is reallyirrelevant because although itmayaffect
the firm’s capital structure, it will not affect its overall required rate of return.
(c) The basic rationale for any financial merger is synergy, and thus,the estimation ofpro-forma cash flows is the
single mostimportantpartof the analysis.
(d) In mostmergers,the benefits ofsynergy and the premium the acquirer pays over the marketprice are summed
and then divided equally between the shareholders ofthe acquiring and targetfirms.
(e) The primaryrationale for mostoperating mergers is synergy.(Points : 20)
Question 3.3. (TCO A) An investor who writes standard call options againststock held in his or her portfolio is said to
be selling whattype of options?
(a) In-the-money
(b) Put
(c) Naked
(d) Covered
(e) Out-of-the-money(Points : 20)
Question 4.4. (TCO F) A swap is a method used to reduce financial risk.Which of the following statements about
swaps,ifany, is not correct?
(a) A swap involves the exchange of cash paymentobligations.
(b) The earliestswaps were currencyswaps in which companies traded debtdenominated in differentcurrencies,say
dollars and pounds.
(c) Swaps are very often arranged by a financial intermediary,who may or may not take the position of one of the
counterparties.
(d) A problem with swaps is thatno standardized contracts exist, which has prevented the developmentof a
secondarymarket.
(e) A companycan swap fixed interestpayments for floating interestpayments.(Points :20)