Details of this Paper

Strayer FIN 540 Week 3 ? Homework Chapter 20

Description

solution


Question

Question;FIN 540 ? Homework Chapter 20;1. Which of the following statements is most CORRECT?;a. By law in most states, all preferred stock must be;cumulative, meaning that the;compounded total of all unpaid preferred dividends must be;paid before any dividends;can be paid on the firm's common stock.;b. From the issuer's point of view, preferred stock is less;risky than bonds.;c. Whereas common stock has an indefinite life, preferred;stocks always have a specific;maturity date, generally 25 years or less.;d. Unlike bonds, preferred stock cannot have a convertible;feature.;e. Preferred stock generally has a higher component cost of;capital to the firm than does;common stock.;2. Which of the following statements about convertibles is;most CORRECT?;a. One advantage of convertibles over warrants is that the;issuer receives additional cash;money when convertibles are converted.;b. Investors are willing to accept a lower interest rate on;a convertible than on otherwise;similar straight debt because convertibles are less risky;than straight debt.;c. At the time it is issued, a convertible's conversion (or;exercise) price is generally set;equal to or below the underlying stock's price.;d. For equilibrium to exist, the expected return on a;convertible bond must normally be;between the expected return on the firm's otherwise similar;straight debt and the;expected return on its common stock.;e. The coupon interest rate on a firm's convertibles is;generally set higher than the market;yield on its otherwise similar straight debt.;3. Which of the following statements concerning warrants is;correct?;a. Warrants are long-term put options that have value;because holders can sell the firm's;common stock at the exercise price regardless of how low the;market price drops.;b. Warrants are long-term call options that have value;because holders can buy the firm's;common stock at the exercise price regardless of how high;the stock's price has risen.;c. A firm's investors would generally prefer to see it issue;bonds with warrants than straight;bonds because the warrants dilute the value of new;shareholders, and that value is;transferred to existing shareholders.;d. A drawback to using warrants is that if the firm is very;successful, investors will be less;likely to exercise the warrants, and this will deprive the;firm of receiving any new capital.;e. Bonds with warrants and convertible bonds both have;option features that their holders;can exercise if the underlying stock's price increases.;However, if the option is exercised;the issuing company's debt declines if warrants were used;but remains the same if it;used convertibles.;4. Which of the following statements is most CORRECT?;a. One important difference between warrants and;convertibles is that convertibles bring in;additional funds when they are converted, but exercising;warrants does not bring in any;additional funds.;b. The coupon rate on convertible debt is normally set below;the coupon rate that would be;set on otherwise similar straight debt even though investing;in convertibles is more risky;than investing in straight debt.;c. The value of a warrant to buy a safe, stable stock should;exceed the value of a warrant to;buy a risky, volatile stock, other things held constant.;d. Warrants can sometimes be detached and traded separately;from the debt with which;they were issued, but this is unusual.;e. Warrants have an option feature but convertibles do not.;5. Mariano Manufacturing can issue a 25-year, 8.1% annual;payment bond at par. Its investment;bankers also stated that the company can sell an issue of;annual payment preferred stock to;corporate investors who are in the 40% tax bracket. The;corporate investors require an after-tax;return on the preferred that exceeds their after-tax return;on the bonds by 1.0%, which would;represent an after-tax risk premium. What coupon rate must;be set on the preferred in order to;issue it at par?;a. 6.66%;b. 6.99%;c. 7.34%;d. 7.71%;e. 8.09%;1. The major contribution of the Miller model is that it;demonstrates that;a. personal taxes decrease the value of using corporate;debt.;b. financial distress and agency costs reduce the value of;using corporate debt.;c. equity costs increase with financial leverage.;d. debt costs increase with financial leverage.;e. personal taxes increase the value of using corporate;debt.;2. Which of the following statements concerning capital;structure theory is NOT CORRECT?;a. Under MM with zero taxes, financial leverage has no;effect on a firm's value.;b. Under MM with corporate taxes, the value of a levered;firm exceeds the value of the unlevered firm by the product of the tax rate;times the market value dollar amount of debt.;c. Under MM with corporate taxes, rs increases with;leverage, and this increase exactly;offsets the tax benefits of debt financing.;d. Under MM with corporate taxes, the effect of business;risk is automatically incorporated;because rsL is a function of rsU.;e. The major contribution of Miller's theory is that it;demonstrates that personal taxes;decrease the value of using corporate debt.;3. Which of the following statements concerning the MM;extension with growth is NOT CORRECT?;a. The value of a growing tax shield is greater than the;value of a constant tax shield.;b. 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.;c. For a given D/S, the WACC is less than the WACC under;MM's original (with tax);assumptions.;d. The total value of the firm increases with the amount of;debt.;e. The tax shields should be discounted at the unlevered;cost of equity.;4. Which of the following statements concerning the MM;extension with growth is NOT CORRECT?;a. The value of a growing tax shield is greater than the;value of a constant tax shield.;b. 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.;c. For a given D/S, the WACC is greater than the WACC under;MM's original (with tax);assumptions.;d. The total value of the firm increases with the amount of;debt.;e. The tax shields should be discounted at the cost of debt.;5. Which of the following statements concerning the MM;extension with growth is NOT CORRECT?;a. The value of a growing tax shield is greater than the;value of a constant tax shield.;b. 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.;c. For a given D/S, the WACC is greater than the WACC under;MM's original (with tax);assumptions.;d. The total value of the firm is independent of the amount;of debt it uses.;e. The tax shields should be discounted at the unlevered;cost of equity.

 

Paper#49541 | Written in 18-Jul-2015

Price : $18
SiteLock