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Date Posted: 15:23:49 03/21/06 Tue
Author: gary
Subject: Re: Sample Final exam
In reply to: Charles Hodges 's message, "Sample Final exam" on 08:32:25 12/07/00 Thu

>Below is a sample final exam that has questions from
>Chapters 11 and 12. Note, the exam will also have
>questions from your first two exams and 5 quizzes that
>total 30 points.
>
>I plan to post solutions to this exam on Saturday. I
>would encourage students to post their suggested
>answers prior to then.
>
>I would have posted this yesterday, but the voy site
>was down for much of the day.
>
>
>
>Exam 3 FI4300 Summer 1999 Your Name
>___________________________
>
>YOU HAVE 2 HOURS TO COMPLETE BOTH PARTS OF THIS EXAM
>Instructions:
>1) The part of the exam is closed book and closed
>notes. No scrap paper is allowed, use the back of the
>exam if necessary.
>2) Read the entire exam before starting. The best
>strategy is generally to "cherry pick". In other
>words, solve the easiest (and/or most familiar)
>problems first. This will save time (and energy) that
>can be expended on the more difficult problems.
>3) Partial points are based on readily observable
>evidence that you know at least part of the solution
>concept. The more evidence presented (and the clearer
>the evidence), the better the chance for partial
>points. In other words, SHOW ALL WORK!
>4) If you have additional time remaining, give your
>work one last check.
>5) True/False questions are worth 2 points.
>Multiple choice questions are worth 4 points. Short
>answer questions usually take less than three
>sentences and are worth 5 points. Problems are worth
>the number of points listed in the question.
>
>
>10-20 points in questions from Exam 1, Exam 2, and the
>five quizzes not shown.
>
>MC1. According to the text, the primary goal for a
>firm's financial managers is to:
> a. Maximize earnings per share. b.
>Maximize long run profits. c. Minimize firm
>risk.
> d. Increase the firm's asset base. e.
>None of the above is the primary goal for a financial
>manager.
>
>SA1. What is the optimal capital structure? Why?
>
>SA2. What is the best capital budgeting decision
>rule? Why
>
>SA3. Of the capital structure decision and capital
>budgeting decision, Which is the most important? Why?
>
>TF1. In perfect capital markets, the way a firm
>finances its assets is irrelevant.
>a. True b. False
>
>TF2. In perfect capital markets, the WACC is
>constant, regardless of the proportion of debt.
>A. True B. False
>
>TF3. In the real world, the expected value of
>bankruptcy costs is negatively related to the degree
>of specialization of the firm's assets.
>A. True B. False
>
>MC2. According to the pecking order view of capital
>structure, which is management's preferred order of
>preference?
>a. Internal equity, debt, preferred stock, external
>equity
>b. Debt, internal equity, preferred stock, external
>equity.
>c. External equity, Internal equity, preferred stock,
>debt.
>d. Preferred stock, internal equity, debt, external
>equity.
>e. None of the above.
>
>SA6. Explain what happens to a firm's value as
>leverage in increased, according to the capital
>markets imperfections/tradeoff view.
>
>
>TF4. Restrictive covenants in bond contracts are
>primarily used to limit potential conflicts between
>stockholders and management.
>A. True B. False
>
>TF5. For most companies, dividends are more stable
>than earnings.
>A. True B. False
>
>
> Exam 3 Summer 1999 FI 4300 Your Name
>______________________________
>
>YOU HAVE 2 HOURS TO COMPLETE BOTH PARTS OF THIS EXAM
>PROBLEM INSTRUCTIONS
>
>* Show all work.
>* Be sure to label each section of the answer.
>* Use the back of the test if you need more room.
>* This portion of the exam is open book, open notes.
>* Set your calculator to four decimal places.
>· Hint, if you cannot solve a problem due to a missing
>number, simply make up a reasonable number and use
>this number to complete the problem. As an example in
>problem 2, if you can't solve for leverage in part A,
>then assume some debt equity mix and use this in part
>B.
>
>10-20 points in questions from Exam 1, Exam 2, and the
>five quizzes not shown.
>
>1. (18 points) Rollins Corporation is constructing
>its MCC schedule. The firm is at its target capital
>structure. Its bonds have a 9 percent coupon, paid
>semiannually, a current maturity of 17 years, and sell
>for $1,125. Rollins' beta is 1.1, the risk-free rate
>is 6 percent, and the expected return on the market is
>12 percent. Rollins is a constant growth firm, which
>just paid a dividend of $3.00, sells for $27.00 per
>share, and has a growth rate of 8 percent. Rollins
>corporate tax rate is 40%.
>The firm's book value balance sheet is as follows:
> Asset $8,000 Long Term Debt $5,000
> Equity ($1 par) $500
> Retained Earnings $2500
>
>
>(2)What is the firm's leverage ratio?
>
>
>
>(4)Assuming the pre-tax cost of debt is 8.7%, and
>using CAPM estimate of the cost of retained earnings,
>what is Rollins' WACC?
>
>
>
>2. (30 points) Use the following information for the
>next several questions. Consider a world of perfect
>capital markets. This world has no corporate or
>personal taxes, all investors have homogeneous
>expectations, no bankruptcy costs, and M&M's no-tax
>theory of capital structure is true.
> Company Y is financed has the following market value
>balance sheet:
>
> Assets = $ 200 Liabilities = $80
> Equity = $120
>
>The firm had $15 in EBIT last year. The firm has 25
>shares outstanding. The firm expects this same return
>for the foreseeable future. The firm a is a zero
>growth firm, that pays out all excess earnings as
>dividends. Any time the firm changes its capital
>structure, it changes only the debt/equity mix and
>does not change its total assets. The firm's
>liabilities consists entirely of perpetual debt. The
>firm's debt is risk-less, perpetual, selling at par,
>and has a 5% yield. If the firm were to change its
>capital structure, new debt would still have a 5%
>yield. The expected return on the market is 14%.
>Given this information, answer the following questions:
>
>A. What is the firm's current weighted average cost
>of capital.
>
>b. What is the current price per share?
>
>Now assume that the firm issues enough equity to
>repurchase all of the firm's debt. This change in
>capital structure reveals no new information about
>future firm prospects.
>
>d. What is the overall firm's new WACC?
>
>e. What is the stock's new beta?
>
>
>Now consider a DIFFERENT COMPANY in a world that of
>perfect capital markets, with one change, CORPORATE
>TAXES DO EXIST. This world has no personal taxes, all
>investors have homogeneous expectations, no bankruptcy
>costs, and M&M's with corporate taxes theory of
>capital structure is true. Company Y is financed has
>the following market value balance sheet:
>
> Assets = $ 165 Liabilities = $70
> Equity = $95
>
>The firm had $25 in EBIT last year. The firm has 19
>shares outstanding. The firm expects the same
>return/profits for the foreseeable future. The firm a
>is a zero growth firm, that pays out all excess
>earnings as dividends. Any time the firm changes its
>capital structure, it changes only the debt/equity mix
>and does not change its total assets. Liabilities
>consist only of the firm's debt. The debt is
>riskless, perpetual, selling at par, and has a 8%
>pre-tax yield. If the firm were to change its capital
>structure, new debt would still have a 8% pre-tax
>yield. The firm's tax rate is 35%. Given this
>information, answer the following questions:
>
>G. What is the value of the firm's tax shield due to
>the use of perpetual debt?
>
>H. What is the current expected return on the firm's
>equity?
>
>I. What is the firm's current dividends per share?
>Note this is not a dividends question, but rather a
>capital structure question.
>
>J. (Fill in the blank, 2 points each) Now assume the
>firm issued an additional $20,000,000 in debt and used
>the funds to repurchase equity. Under this scenario,
>the required rate of return on the equity would
>_________________ (be lower/be higher/be unchanged),
>while the overall WACC of the firm would
>________________(be lower/be higher/be unchanged).

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