Strayer FIN 540 FIN/540 FIN540 Midterm Solutions

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FIN 540 Advanced Corporate Finance Midterm Answers (Strayer)

  1. Which of the following statements is NOT CORRECT?
  2. From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee’s
  3. Which of the following statements is most CORRECT?
  4. Which of the following statements is most CORRECT?
  5. Which of the following is generally NOT true and an advantage of going public?
  6. In the lease versus buy decision, leasing is often preferable
  7. Which of the following statements is most CORRECT?
  8. Which of the following statements concerning warrants is correct?
  9. Firms use defensive tactics to fight off undesired mergers.  These tactics do not include
  10. Chapter 7 of the Bankruptcy Act is designed to do which of the following?
  11. Which of the following statements is most CORRECT?
  12. Which of the following statements is most CORRECT?
  13. Which of the following statements about valuing a firm using the APV approach is most
  14. Which of the following statements concerning common stock and the investment banking process is NOT CORRECT?
  15. Which of the following statements is most CORRECT?
  16. Which of the following statements is most CORRECT?
  17. Operating leases often have terms that include
  18. Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the
  19. Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment.  The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments.  Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each.  How much larger or smaller is the bank loan payment than the lease payment?  Note: Subtract the loan payment from the lease payment.
  20. New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago.  It has been amortizing $3 million of flotation costs on these bonds over their 30-year life.  The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today’s market.  A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million.  NYW’s marginal tax rate is 40%.  The new bonds would be issued when the old bonds are called.What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?
  21. Europa Corporation is financing an ongoing construction project.  The firm will need $5,000,000 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 in 3 years, when the project has been completed.  Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds.  Yearly flotation costs for 3 separate issues 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?
  22. Dunbar Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware.  Dunbar’s analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16%.  Eastern has 4 million shares outstanding and no debt.  Eastern’s current price is $16.25.  What is the maximum price per share that Dunbar should offer?
  23. Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%.  Great Subs’ analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4.  (The Year 4 cash flow includes a horizon value of $107 million.)  The acquisition would be made immediately, if it is to be undertaken.  Eastern’s pre-merger beta is 2.0, and its post-merger tax rate would be 34%.  The risk-free rate is 8%, and the market risk premium is 4%.  What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?
  24. Chocolate Factory’s convertible debentures were issued at their $1,000 par value in 2009.  At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock.  What is the conversion price, Pc?
  25. A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can’t be consolidated.  The parent receives annual dividends from the subsidiary of $2,500,000.  If the parent’s marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?