Corporate Finance

All Multiple choice questions, only one correct answer

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Cartes-fiches	136
Langue	Deutsch
Catégorie	Finances
Niveau	Université
Crée / Actualisé	02.12.2024 / 15.12.2024
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StartUp Incorporated is developing a new project that will cost $10,000 today and will pay either $15,000 or $8,000 one year from now. Consider a twin security that is expected to payout $37,500 in the up state and $20,000 in the down state and is currently priced at $24,000. Startup Incorporated has the option to wait until the end of the year to decide whether to invest in the project or not. What is the price of this option? Assume a risk-free rate of 10%.

$1,662.34

$2,062.34

-$400.00

$10,000.00

Which of the following statements is false?

Real estate firms are likely to have low costs of financial distress, as much of their value derives from assets that can be sold relatively easily.

For low levels of debt, the risk of default remains low and the main effect of an increase in leverage is an increase in the interest tax shield.

Firms whose value and cash flows are very volatile (for example, semiconductor firms) must have much higher levels of debt to avoid a significant risk of default.

The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default.

Suppose a firm has a loan of 2 million euros due next year. All else equal, its assets will be worth 1.8 million euros at that time and it will default on its debt. Now consider the managers, who are consistently seeking to create value to shareholders, are evaluating an opportunity that requires an investment of 150 thousand euros and will generate 100% risk free return. On top of this, it is known that equity holders will need to contribute themselves with the 150 thousand euros in new capital. If the risk-free rate is 5%, which of the following statements best reflect the expected scenario for the firm.

The firm will invest in the project capturing 136 thousand euros for equity holders

The firm will invest in the project capturing 55 thousand euros for equity holders

The firm will not invest in the project that would have a negative value for equity holders of 136 thousand euros

The firm will not invest in the project that would have a negative value for equity holders of 55 thousand euros

Being the owner of a piece of land near the sea, you decide to purchase insurance that will pay you 500 million euros in the event the land is destroyed by a tsunami, knowing the likelihood for this to happen is 0.05%. Given the beta of an insurance for these cases if -0.2 what is the actuarially fair premium, if the risk-free rate is 3% and the expected return of the market is 8%?

250 thousand euros

247 thousand euros

245 thousand euros

240 thousand euros

Which of the following is NOT a way that a firm can increase its dividend?

By increasing its retention rate

By decreasing its shares outstanding

By increasing its earnings (net income)

By increasing its dividend payout rate

A type of agency problem that results in shareholders gaining from decisions that
increase the risk of the firm sufficiently, even if they have negative NPV is:

Asset substitution.

Debt overhang.

Underinvestment.

Cashing out.

9. Consider the following statements:
i. The existence of at least one incremental IRR implies that both projects have
at least one IRR.
ii. At least one IRR exists if the project with positive NPV has an outflow at time
zero.
iii. The profitability index method provides an accurate answer if the constraint is
fully saturated.

Only (i) and (iii) are true

Only (ii) and (iii) are true

All statements are true

All statements are false

A company’s management believes the shares are undervalued. What is the order
of the financing sources that the company will choose?

Retained earnings -> Debt -> Equity

Debt -> Retained earnings -> Equity

Equity -> Debt -> Retained earning

Retained earnings -> Equity -> Debt

Rejecting an investment today forever might not be a good choice because:

(I) The size of the firm will decline.
(II) There are always errors in the estimation of the NPVs.
(III) The option value is negative.
(IV) The company is foregoing future rights or the option to deepen the investment if economic and industry conditions change for the better

I only

II only

I, II, and III only

IV only

Consider the following three statements:
(1) A real option is always present if there is uncertainty about the future development
of the market (e.g., demand)
(2) The option to abandon a Project is akin to a call option
(3) Real options are usually easier to identify and value than financial options

Only (1) is correct.

Only (1) and (2) are correct

All statements are correct.

All statements are incorrect

Analysts expect Pineapple Inc. to face increased competition on the beverage market, which would result in Pineapple Inc. losing 5% of their market share over the next two years, and then to have stable income with no growth forever. Currently the company follows a target debt-to-value strategy. Tomorrow it is planning to hold a press conference, where the CEO will announce that the company will change its debt structure strategy to permanent debt in three years. How will the value of the shares change after the press conference? Assume perfect capital markets

The share price will decrease

The share price will remain the same

The share price will increase

The market reaction is not certain

A project has an up-front cost of $100,000. The project's WACC is 12%, and its net present value is $10,000. Which of the following statements is most correct?

The project should be rejected since its return is less than the WACC.

The project's internal rate of return is greater than 12 percent.

All of the statements above are correct

None of the statements above is correct

In M&M’s perfect capital markets which of the following statements is FALSE?

With perfect capital markets, leverage merely changes the allocation of cash flows between debt and equity, without altering the total cash flows of the firm.

Leverage does not increase the risk of equity if there is no risk that the firm will default

It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.

In the absence of taxes or other transaction costs, the total cash flow paid out to all of a firm's security holders is equal to the total cash flow generated by the firm's assets.

Which one of these statements about costs of financial distress is
CORRECT?

Expenses for lawyers, accountants, restructuring advisors, etc. are indirect costs associated with legal bankruptcy.

Fire sales refer to companies in distress selling their assets at prices equal to or above their fair values

Time that the management spends dealing with creditors cannot be counted as cost of financial distress

Indirect costs of financial distress are realized before the firm files for bankruptcy

According to the tradeoff theory, the optimal capital structure tends to include MORE debt for firms with:

the highest depreciation deductions.

the lowest marginal tax rate.

low probabilities of financial distress

less taxable income

Which of the following statements regarding recapitalizations is FALSE?

With a recapitalization, even though leverage reduces the total value of equity, shareholders capture the benefits of the interest tax shield up front.

The share price always rises after the completion of the recapitalization.

Recapitalization changes cost of equity

In the presence of corporate taxes, we include the interest tax shield as one of the firm's assets on its market value balance sheet.

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