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1-Which of the following statement is correct: a-...

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1-Which of the following statement is correct: a- If the new debt, is used to refund old debt, the correct discount rate to use in the refunding analysis is the before tax cost of new debt. b- The key benefits associated with refunding debt are the reduction in the firm?s debt ratio and the creation of more reserve borrowing capacity. c- The mechanics of finding NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires forecast of future interest rates. d- If a firm with positive NPV refunding project delays refund and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though is actually refunds the debt after rate has risen. e- Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings. 2-Which of the following is generally not true and an advantage of going public: a- Facilitates stockholders diversification b- Increase the liquidity of the firm stock c- Makes it easier to obtain new equity capital d- Establish a market value for the firm e- Makes it easier for owner managers to engage in profitable self dealings 3- Firms use defensive tactics to fight off undesired mergers. These tactics do not include: a- Raising antitrust issues b- Getting a white squire to purchase stock in the firm c- Getting white knights to bid for the firm d- Repurchasing their own stock e- Changing the bylaws to eliminate supermajority voting requirements 4- Which of the statement about valuing a firm using APV approach is most correct? a- The horizon value is calculated by discounting the cash flows beyond the horizon date and any tax savings at the levered cost of equity b- The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt c- The horizon value is calculated by discounting the expected earnings at the WACC d- The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC e- The horizon value must always be more than 20 years in the future 5- Which is statement is not correct a- When a corporation shares are owned by a few individuals who own most of the stock or are part of the firm?s management we say the firm is closely or privately owned b- Going public establishes a firm?s true intrinsic value and ensures that a liquid market will always exist for the firm?s shares. c- Publicly owned company have sold shares to investors who are not associated with management and they must register with and report a regulatory agency such as the SEC d- When stock in a closely held corporation is offered to the public for the first time the transaction is called going public and the market for such stock is called the new issue market e- It is possible for a firm to go public and yet not raise any additional new capital 6- Euro.Corp. is financing an ongoing construction project. The firm will need $ 5000,000 of new capital during each of the next 3 years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40% debt and 60% equity and it wants to be at that structure 3 years, when the project has been completed. Debt flotation cost for a single debt issue would be 1.6% or the gross debt proceeds. Yearly flotation costs for 3 separate issue of debt would be 3.0% of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in 3 separate issues. a- $79,425 b- $83,606 c- $88,006 d- $92,406 e- $97,027

 

Paper#2559 | Written in 18-Jul-2015

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