(Get Answer) – (tco b) which of the following statements concerning the mm extension

(TCO B) Which of the following statements concerning the MM extension with growth is not correct?

1. (TCO B) Which of the following statements concerning the MM extension with growth is not correct?

(a) The tax shields should be discounted at the unlevered cost of equity.

(b) The value of a growing tax shield is greater than the value of a constant tax shield.

(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions.

(d) For a given D/S, the WACC is less than the WACC under MM’s original (with tax) assumptions.

(e) The total value of the firm increases with the amount of debt. (Points : 20)

Question 2. 2. (TCO D) Which of the following statements about listing on a stock exchange is most correct?

(a) Listing is a decision of more significance to a firm than going public.

(b) Any firm can be listed on the NYSE as long as it pays the listing fee.

(c) Listing provides a company with some free advertising, and it may enhance the firm’s prestige and helps it do more business.

(d) Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.

(e) The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE. (Points : 20)

Question 3. 3. (TCO E) Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm has the option to buy these tools. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at interest rate of 10% and buy the tools. The loan payments would be made at the end of each year. If it decides to lease or it can make three equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan with interest paid at the end of the year. The firm’s tax rate is 40%. The Total Cash Outflows from the Cost of Purchase are the following: (Year 1)+208; (Year 2) +208; (Year 3) -4,592; all occurring at the end of respective years. Calculate the leasing cash outflows, and compare the Present Values. What is the net advantage to leasing (NAL), in thousands?

(Suggestion: Delete three zeros from dollars and work in thousands.)

(a) $96

(b) $106

(c) $112

(d) $117

(e) $123 (Points : 20)

Question 4. 4. (TCO I) Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the United States, 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?

(a) 1 pound = $1.8000

(b) 1 pound = $1.6582

(c) 1 pound = $1.0000

(d) 1 pound = $0.8500

(e) 1 pound = $0.6031 (Points : 20)

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Question 1. 1. (TCO C) D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?

Net Income Payout

(a) $898,750 55.63%

(b) $943,688 58.41%

(c) $990,872 61.43%

(d) $1,040,415 64.40%

(e) $1,092,436 67.62% (Points : 20)

Question 2. 2. (TCO F) Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds with warrants so that the package would sell for $1,000?

(a) 6.75%

(b) 7.11%

(c) 7.48%

(d) 7.88%

(e) 8.27% (Points : 20)

Question 3. 3. (TCO B) Which of the following statements is correct, holding other things constant?

(a) Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.

(b) An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.

(c) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.

Question 4. Which of the following statements is most correct?

(a) The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.
(b) The basic doctrine of fairness states that all debt holders must be treated equally.
(c) Because the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the public interest is not a relevant concern.
(d) Although a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
(e) To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.


Approximately 250 words