PoRooskycompany Finance Assingment Help With Solution

Posted on April 12, 2017

PoRooskycompany Finance Assingment Help With Solution

 
Multiple Choice

1. Which of the following is not a form of equity financing?
a. Owner’s investing their savings
b. Venture capital
c. Common stock
d. Bank loan
 
2. Which of the following is NOT a potential detriment (problem) of debt financing?
a. Potential bankruptcy cost
b. Tax benefit on interest payments
c. Agency cost
d. Loss of financial flexibility
 
3. Which of the following is not considered a form of hybrid securities?
a. Corporate bonds
b. Convertible debt
c. Preferred stock
d. Option-linked bonds
 
4. Which of the following is reflective of a firm early in its lifecycle?
a. Lower need for new financing as projects are limited
b. Firm may retire debt with earnings
c. Debt is the preferred choice of financing
d. The ability to finance internally is limited
 
5. An example of a difference between the interests of the debt and equity holders of the firm may include all except:
a. Debt holders are interested in getting their money back
b. Stockholders may wish to invest in riskier projects
c. Stockholders pay themselves a larger dividend than debt holders prefer
d. Stockholders are not interested in maximizing their wealth
 
6. If a firm is valued at $200 and its level of equity is $120, the debt to capital ratio is:
a. 60%
b. 100%
c. 40%
d. Not able to be determined
 
7. We witnessed all except the following during the debt crisis of the late 2000’s
a. A surge in risk premiums for both debt and equity
b. Consistent access to the debt markets by larger corporations (although at higher costs)
c. Defaults rising to historic levels
d. A weakening of global consumer demand
 
8. Which of the following does not impact the cost of debt?
a. General level of interest rates
b. Dividend yield
c. Default premium
d. The firm’s marginal tax rate
 
9. The weighted average cost of capital is a function of:
a. The components used for financing and weights
b. The cost of each component
c. Marginal tax rate on debt
d. All of above
 
10. Which of the following when it decreases generally will signal an increased after-tax cost of debt?
a. Bond rating
b. Dollar amount of debt used
c. Interest rate on debt
d. Debt ratio
 

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11. Stock buybacks have increased in popularity due to industry trends of:
a. Decreased earnings volatility making it easier to maintain dividends
b. Decreasing proportion of investors invested primarily for capital gains
c. Stock buybacks are an alternative to manage EPS
d. None of above
 
12. When a firm’s debt levels rise a spiral of negative outcomes take place. Which of the following is not a correct part of the spiral?
a. Interest coverage ratios increase
b. Cost of debt rises
c. Interest expenses rise
d. Interest coverage ratio declines
 
13. Which of the following would not be a logical premise concerning an optimal debt ratio?
a. Higher tax rates lead to higher debt ratio because of tax benefit
b. Lower inside equity ownership leads to higher debt ratios
c. More variance in firm income leads to higher debt ratio because probability of bankruptcy decreases
d. More intangible assets will lead to lower debt ratios because of agency problems
 
14. Which of the following does not impact the cost of debt?
a. General level of interest rates
b. Dividend yield
c. Default premium
d. The firm’s marginal tax rate
 
15. Which of the following is not a feature of equity financing?
a. Residual claim
b. Fixed claim
c. Lowest priority in financial trouble
d. Offers management control
 
16. GE expected return on common stock is 8% with price appreciation in its stock equal to 5%. What is GE’s dividend yield over the same period?
a. 13%
b. 8%
c. 3%
d. Cannot be determined
 
17. A stock dividend will:
a. Increase number of shares and subsequently increase share price.
b. Increase number of shares and subsequently decrease share price.
c. Increase earnings per share.
d. None of the above
 
18. AD Engineering had paid $100 of dividends on $400 of earnings. What is AD’s retention ratio? (proportion of earnings reinvested in the firm)
a. 75%
b. 25%
c. 400%
d. 300%
 
19. AD engineering is an established firm with limited growth prospects, the has been in existence since 1960. What would be an expected appropriate dividend payout ratio?
a. 0%
b. 15%
c. 30%
d. 75%
 
20. Which of the following is not an expectation about corporate dividend policy?
a. Dividends lead earnings over time.
b. Dividends tend to be sticky downwards.
c. Dividends tend to be less volatile than earnings.
d. Dividends tend to follow a pattern of payment over the life cycle of the firm.
 
True/False

1. When raising external financing, the use of debt vastly overwhelms the use of new equity.
2. Retained earnings represents an internal source of financing
3. When a firm issues more equity than buys back stock, this results in the creation of “negative net equity”.
4. When a firm decides to go public through an IPO, it may have greater access to capital, but also is likely to face greater disclosure requirements.
5. Dell Corporation has recently completed going from a private corporation to a public corporation.
6. Valuation of the firm by an investment bank in the IPO process is usually not an assumption-based process.
7. All things being equal, the higher the marginal tax rate of the firm, the lower the debt level the firm will have in its capital structure.
8. Debt ratios of firms incorporated in high-tax localities should be higher than debt ratios of firms in low-tax localities.
9. Utilizing debt in the capital structure re-enforces the need for corporate discipline.
10. As a firm borrows more it increases its probability of bankruptcy
11. Firms with more stable earnings and cash flows will generally have a lower probability of bankruptcy.
12. Credit Default Swap spreads provides indicative information to the market as to a firm’s probability of bankruptcy.
13. A bank would likely assume that the agency costs associated with a bankruptcy would be smaller with a start-up firm. (given the same asset size of the firms)
14. A firm that has levered itself to 100% has increased its financial flexibility with the marginal money raised.
15. Miller and Modigliani were the first to propose that the value of the firm is dependent on its debt ratio.
16. When raising external funds from markets, firms are far more likely to use equity over debt.
17. Minimizing the cost of capital will always maximize the value of the firm.
18. There is a positive relationship between the interest rate used to discount cash flows and the value of cash flows to which the rate is applied.
19. Equity investors always stand behind debt holders when it comes to claims on corporate cash flows.
20. Academics and practitioners now agree that minimizing the cost of capital has no relationship to maximizing firm value.
21. There is a positive relationship between bond debt ratings and probability of default (bankruptcy)
22. As a firm’s levered beta increases, the firm’s cost of equity will generally decline.
23. The interest coverage ratio generally is higher for firms with better agency ratings
24. The interest coverage ratio generally needs to be more for smaller firms to get the same ratings as larger firms (ceteris paribus – holding all else equal)
25. The cost of capital curve that a firm faces is generally a smooth function as impacted by agency ratings changes.
26. Improving a firm’s credit rating is always beneficial to the firm.
27. Banks faced with increased regulatory capital requirements will have to decrease their equity levels to remain well capitalized
28. Adding debt to the capital mix makes debt and equity more expensive.
29. In general, growth firms will have higher cash flows, but lower optimal debt ratios.
30. The decision to hold back net income for retained earnings is made after the dividend has been paid.
31. Older firms are likely to retain more earnings for investment opportunities.
32. Dividend decreases were more frequent for U.S. companies during the recent crisis.
33. GE was one of the few AAA rated firms to keep it AAA rating and maintain its trend of quarterly dividend increases.
34. When a firm borrows money it has to add back the borrowing costs to arrive at taxable income.
35. Indirect bankruptcy cost will be lower for firms with longer-life assets.
36. Dividends payments in the US tend to be double taxed.
37. Dividend payments in countries with lax corporate control will tend to have higher dividend payout ratios.
38. M&M theory postulated that dividends were irrelevant.
39. Dividend payout ratios in G7 counties tend to be much lower than those in emerging markets.
40. A firm in its decline has a high capacity to pay dividends.
 
Exercise questions:
PoRooskycompany is a technical firm that supplies robotic helpers to senior centers and hospitals. The firm is a start-up and wishes to access more funding through the IPO market. If the firm’s estimated financing need is $100 million

1. How many shares will the investment banker issue to arrive at a target price of $20/shr?
a. 2 million shares
b. 5 million shares
c. 10 million shares
d. 20 million shares

2. If the Investment Bank charges 70 basis points underwriting fees on the notional amount of the IPO, what canPoRoosky expect to be charged for underwriting?
a. $70,000
b. $200,000
c. $700,000
d. $7,000,000
 
Answer the next 3 questions using the following. Consider the following information about two stocks where the probability of an economic boom is 40%:

Economic State Return A (RA) Return B (RB)
Boom 38% 6%
Recession –4% 12%
 
3. Calculate the expected return for stock A and stock B.
a. Stock A 10.2%, Stock B 9.6%
b. Stock A -12.8%, Stock B 9.6%
c. Stock A 9.4%, Stock B -12.8%
d. Stock A 12.8%, Stock B 9.6%
 
4. Calculate the standard deviation of stock A and stock B. (round to 2 places)
a. Stock A 4.23%, Stock B 9.6%
b. Stock A 20.58%%, Stock 2.94%%
c. Stock A 4.23%, Stock B 0.0009%
d. Stock A 20.58%, Stock B 2.94%

5. If the Covariance between the two stocks is -0.006048, and the portfolio is made of 12.5% of stock A and 87.5% stock B, the Variance of the portfolio is very close to:
a. 0.0
b. 0.5
c. 1.0
d. 2.0
 
6. Using the CAPM (capital asset pricing model) and SML (security market line), what is the expected rate of return for an investment with a Beta of 1.8, a risk free rate of return of 4%, and a market rate of return of 10%.
a. 14.8%
b. 22.4%
c. 1.8%
d. 11.2%
 
7. You know that an investment with a beta of 1 generates an expected return of 9%, you also know that another investment, which has a beta of 0, generates a return of 2%. What return can you expect on an investment with a beta of 0.75?
a. 9.0%
b. 2.0%
c. 0.0%
d. 7.25%
 
8. The clothing manufacturer, Medical Mad Men, is considering introducing a line of t-shirts that will enable complete monitoring of the medical stats of the wearer, and simultaneously allow remote monitoring. The project costs $4.6 million and will generate cash flows of $1 million for 5 years. What is the payback period?
a. 5 years
b. 1 year
c. 4.6 years
d. None of above
 
9. The clothing manufacturer, Medical Mad Men, is considering introducing a line of t-shirts that will enable complete monitoring of the medical stats of the wearer, and simultaneously allow remote monitoring. The project costs $4.6 million and will generate cash flows of $1 million for 5 years. If the interest rate is 3.66% annually, what is the project’s NPV? (you should get close but don’t sweat if you are a dollar or two off)
a. -$105,334
b. 105,334
c. -400,000
d. 400,000
 
10. Dell has four divisions and four division betas. Determine the Beta of the firm.
Division Market Value Beta
Mainframes 2.0 Billion 1.10
PCs 2.0 Billion 1.50
Software 1.0 Billion 2.00
Printers 3.0 Billion 1.00
Total 8.0 Billion
a. 1.350
b. 1.500
c. 1.275
d. 1.150
 

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