Fi516-Solution for Study Guide for Final Exam
Business and Management
Submitted By thethe2011
Solutions for Study Guide for Final Exam
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 greater than the WACC under MM's original (with tax) assumptions.
(e) The total value of the firm is independent of the amount of debt it uses. (Points: 20)
2. (TCO D) Which of the following statements is most CORRECT? (a) In a private placement, securities are sold to private (individual) investors rather than to institutions.
(b) Private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
(c) Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
(d) The SEC requires that all private placements be handled by a registered investment banker.
(e) Private placements can generally bring in funds faster than is the case with public offerings. (Points: 20)
3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the following: (Year 1) - 6,339; (Year 2) -4,764; (Year 3)-9,943; (Year 4) -5,640; all occurring at the end of...