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FIN 516 Week 8 Final Exam

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FIN 516 Final Exam


Question 1. (TCO B) Which of the following statements concerning the MM extension with
growth is not correct?
Question 2.(TCO D) Which of the following statements is most correct?
Question 3.(TCO E) Buster's Beverages is negotiating a lease on a new piece of equipment that
would cost $100,000 if purchased. The equipment falls 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 equipment after 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 at the beginning of the respective
years. Alternatively, the firm could lease the equipment for 3 years, with annual lease payments
of $29,000 per year, payable at the beginning of each year. The firm is in the 20% tax bracket. If
it borrows and purchases, it could obtain a 3-year simple interest loan, to purchase the equipment
at a before-tax interest rate of 10%. If there is a positive net advantage to leasing, the firm will
lease the equipment. Otherwise, it will buy it. What is the NAL?
Question 4.(TCO I) Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1
Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the
price of hockey skates in the United States?
Question 5. (TCO C) Dentaltech Inc. projects the following data for the coming year. If the firm
follows the residual dividend policy and also maintains its target capital structure, what will its
payout ratio be?
Question 6. (TCO F) Warren Corporation's stock sells for $42 per share. The company wants 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
straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that
the stock sells for $42. What coupon interest rate must the company set on the bonds in order to
sell the bonds-with-warrants at par?

Question 7. (TCO B) Reynolds Resorts is currently 100% equity financed. The CFO is
considering a recapitalization plan under which the firm would issue long-term debt with a yield
of 9% and use the proceeds to repurchase common stock. The recapitalization would not change
the company's total assets, nor would it affect 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 likely to occur if the company goes ahead with the
recapitalization plan?
Question 8. (TCO G) Which of the following statements is most correct?
(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
bankruptcy are governed solely by state laws.
(c) All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in
financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective
of the firm's management.
Question 9. (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 amount of yen today but the current exchange rate is 144
yen per dollar, what would the car be selling for today in U.S. dollars?
Question 10. (TCO H) Which of the following statements is most correct?
Question 11. (TCO A) An investor who writes standard call options against stock held in his or
her portfolio is said to be selling what type of options?
Question 12. (TCO F) A swap is a method used to reduce financial risk. Which of the following
statements about swaps, if any, is not correct?