DeVry University FIN 516 Complete

Course

Get help for DeVry University FIN 516 complete course. We provide assignment, homework, discussions,
quiz and case studies help for all subject DeVry University for Session 2015-2016.

FIN 516 Week 1 Discussion 1

Is the valuation of preferred stock similar to that of bonds? Why?
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FIN 516 Week 1 Discussion 2

You are a CFO preparing to consider an introduction of a dividend payout policy. What factors would
affect your judgment?
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FIN 516 Week 1 Assignment

Problem 17.7 on Ex-dividend PriceBased on Chapter 17 Payout Policy
Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 millionshares
outstanding with a current market price of $15 per share. Natsams board has decided to payout this
cash as a one-time dividend.
a.

What is the ex-dividend price of a share in a perfect capital market?

b.
If the board instead decided to use the cash to do a one-time share repurchase, in a perfect
capital market, what is the price of the shares once the repurchase is complete?
c.

In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off?

Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy

Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%.
Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend.
a.
paid?

Absent any other trading frictions or news, what will its share price be just after the dividend is

Suppose Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a
special dividend.
b.

What net tax savings per share for an investor would result from this decision?

c.

What would happen to Arbuckles stock price upon the announcement of this change?

Problem 17-19 on Dividend Capture StrategyBased on Chapter 17 Payout Policy

Que Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per
share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay
different tax rates on dividends.
Absent transactions costs, what is the highest dividend tax rate of an investor who could gain from
trading to capture the dividend?
Problem 23-5 on Preferred Stock Based on Chapter 23 Raising Equity Capital
Three years ago, you founded your own company. You invested $100,000 of your money and received 5
million shares of Series A preferred stock. Since then, your company has been through three additional
rounds of financing.

Round Price ($)

Number of Shares

Series B 0.50

1,000,000

Series C 2.00

500,000

Series D4.00

500,000

a.

What is the premoney valuation for the Series D funding round?

b.

What is the postmoney valuation for the Series D funding round?

c.
Assuming that you own only the Series A preferred stock (and that each share of all series of
preferred stock is convertible into one share of common stock), what percentage of the firm do you own
after the last funding round?
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FIN 516 Week 2 Discussion 1

Discuss different costs of internal and external financing.
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FIN 516 Week 2 Discussion 2

Your companys CEO has just learned that your firms equity can be viewed as an option. Why might he or
she want to increase the riskiness of the company, and why might other stakeholders be unhappy about
this?
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FIN 516 Week 2 Case Study

Select an industrial or commercial U.S. based company that is listed on one of the major stock
exchanges in the United States. Each student should select a different company. Avoid selecting an
insurance company or a bankthe financial ratios for insurance companies and banks are different.

Write a seven- to eight-page double-spaced paper about your selected company answering the
questions posted under the Week 2 Minicase assignment posted in Doc Sharing. This Minicase paper
should be submitted to the Week 2 Minicase Dropbox.
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FIN 516 Week 2 Assignment

Problem 14.11 Based on Chapter 14 WACC and Modigiani& Miller Extension Models With Growth
Assumptions
Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.114.3). Suppose she
funds the project by borrowing $750 rather than $500.
a.
According to MM Proposition I, what is the value of the equity? What are its cash flows if the
economy is strong? What are its cash flows if the economy is weak?
b.

What is the return of the equity in each case? What is its expected return?

c.
What is the risk premium of equity in each case? What is the sensitivity of the levered equity
return to systematic risk? How does its sensitivity compare to that of unlevered equity? How does its
risk premium compare to that of unlevered equity?
d.

What is the debt-equity ratio of the firm in this case?

e.

What is the firms WACC in this case?

Problem 14-18 Based on Chapter 14: WACC and Modigliani &Miller Extension Models With Growth
Assumptions
In mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity
beta of 0.90 (as reported on Yahoo! Finance). Included in AOLs assets was $1.5 billion in cash and riskfree securities. Assume that the risk-free rate of interest is 3% and the market risk premium is 4%.
a.

What is AOLs enterprise value?

b.

What is the beta of AOLs business assets?

c.

What is AOLs WACC?

Problem 15-15 Based on Chapter 15:Debt and Taxes

Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme
plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of 7.5% on its
debt and has a corporate tax rate of 35%.
a.
If Acmes free cash flow is expected to be $7 million next year and is expected to grow at a rate
of 3% per year, what is Acmes WACC?
b.

What is the value of Acmes interest tax shield?

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FIN 516 Week 3 Discussion 1

How do forward contracts differ from futures contracts? How do both of these differ from options
contracts?
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FIN 516 Week 3 Discussion 2

How can swaps be used to reduce the risks associated with debt contracts?
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FIN 516 Week 3 Assignment

Problem 20.6 on Call Options Based on Chapter 20
Excel file included
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3
months time.
a)

If the stock is trading at $55 in 3 months, what will be the payoff of the call?

b)

If the stock is trading at $35 in 3 months, what will be the payoff of the call?

c)
Draw a payoff diagram showing the value of the call at expiration as a function of the stock price
at expiration.
Problem 20-8 on Put Options Based on Chapter 20
(Excel file included)
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months
time.
a)

If the stock is trading at $8 in 6 months, what will be the payoff of the put?

b)

If the stock is trading at $23 in 6 months, what will be the payoff of the put?

c)
Draw a payoff diagram showing the value of the put at expiration as a function of the stock price
at expiration.
Problem 20-11 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest you might
earn over the remaining few days life of the options, consider the following.
a)
Compute the break-even IBM stock price for each option (i.e., the stock price at which your total
profit from buying and then exercising the option would be 0).
b)

Which call option is most likely to have a return of 100%?

c)

If IBMs stock price is $216 on the expiration day, which option will have the highest return?

Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21
Rebecca is interested in purchasing a European call on a hot new stockUp, Inc. The call has a strike
price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard
deviation of 40% per year. The risk-free interest rate is 6.18% per year.
a)

Using the Black-Scholes formula, compute the price of the call.

b)

Use put-call parity to compute the price of the put with the same strike and expiration date.

Problem 30-14 on Swaps Based on Chapter 30

Your firm needs to raise $100 million in funds. You can borrow short-term at a spread of 1% over LIBOR.
Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year treasuries,
which currently yield 7.60%. Current 10-year interest rate swaps are quoted at LIBOR versus the 8%
fixed rate.

Management believes that the firm is currently underrated and that its credit rating is likely to improve
in the next year or two. Nevertheless, the managers are not comfortable with the interest rate risk
associated with using short-term debt.
a)

Suggest a strategy for borrowing the $100 million. What is your effective borrowing rate?

b)
Suppose the firms credit rating does improve 3 years later. It can now borrow at a spread of
0.50% over treasuries, which now yield 9.10% for a 7-year maturity. Also, 7-year interest rate swaps are
quoted at LIBOR versus 9.50%. How would you lock in your new credit quality for the next 7 years? What
is your effective borrowing rate now?
Problem 30-6 on Futures Contract Based on Chapter 30
(Excel file included)
Your utility company will need to buy 100,000 barrels of oil in 10 days, and it is worried about fuel costs.
Suppose you go long 100 oil futures contracts, each for 1,000 barrels of oil, at the current futures price
of $60 per barrel. Suppose futures prices change each day as follows.
a)

What is the mark-to-market profit or loss (in dollars) that you will have on each date?

b)
What is your total profit or loss after 10 days? Have you been protected against a rise in oil
prices?
c)
What is the largest cumulative loss you will experience over the 10-day period? In what case
might this be a problem?
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FIN 516 Week 4 Discussion 1

What factors are involved in the Initial Public Offering decision?
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FIN 516 Week 4 Discussion 2

How effective is the U.S. Securities and Exchange Commission as a regulator of the fund raising process
by publicly listed corporations?

http://www.justquestionanswer.com/viewanswer_detail/FIN-516-WEEK-4-How-effective-is-the-U-SSecurities-and-Exch-15277

FIN 516 Week 4 Mid Term

Initial Public Offerings Investment Banking Venture Capital and Law and Regulations of the Securities
Industry Quiz
Question 1.1. (TCO C) Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a
target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this
year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend
payment?
(a) $205,000
(b) $500,000
(c) $950,000
(d) $2,550,000
(e) $3,050,000
Question 2.2. (TCO F) The following data applies to Saunders Corporation's convertible bonds.
Maturity: 10
Stock price: $30.00
Par value: $1,000.00
Conversion price: $35.00
Annual coupon: 5.00%
Straight-debt yield: 8.00%
What is the bond's straight-debt value?
(a) $684.78
(b) $720.82
(c) $758.76
(d) $798.70

(e) $838.63
Question 3.3. (TCO B) Vu Enterprises expects to have the following data during the coming year. What is
Vu's expected ROE?
Assets $200,000 Interest rate 8%
D/A 65% Tax rate 40%
EBIT $25,000
(a) 12.51%
(b) 13.14%
(c) 13.80%
(d) 14.49%
(e) 15.21%
Question 4.4. (TCO B) Your firm has debt worth $200,000, with a yield of 9%, and equity worth
$300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of
equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, that is,
how much value does the use of debt add?
(a) $92,571
(b) $102,857
(c) $113,143
(d) $124,457
(e) $136,903
Question 5.5. (TCO A) Which of the following statements is correct?
(a) An option's value is determined by its exercise value, which is the market price of the stock less its
striking price. Thus, an option can't sell for more than its exercise value.
(b) As the stocks price rises, the time value portion of an option on a stock increases because the
difference between the price of the stock and the fixed strike price increases.
(c) Issuing options provides companies with a low cost method of raising capital.
(d) The market value of an option depends in part on the option's time to maturity and also on the
variability of the underlying stock's price.

(e) The potential loss on an option decreases as the option sells at higher and higher prices because the
profit margin gets bigger.
Question 6.6. (TCO F) Suppose the December CBOT Treasury bond futures contract has a quoted price of
80-07. What is the implied annual interest rate inherent in the futures contract? Assume this contract is
based on a 20-year Treasury bond with semiannual interest payments. The face value of the bond is
$1,000, and the semiannual coupon payments are $30. The annual coupon rate on the bonds is $60 per
bond (or 6%). The futures contract has 100 bonds.
(a) 6.86%
(b) 7.22%
(c) 7.60%
(d) 8.00%
(e) 8.40%
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FIN 516 Week 4 Assignment

Problem 23.3 on Implied Price of Funding Based on Chapter 23
Starware Software was founded last year to develop software for gaming applications. Initially, the
founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second
round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest
$1 million and wants to own 20% of the company after the investment is completed.
a)
How many shares must the venture capitalist receive to end up with 20% of the company? What
is the implied price per share of this funding round?
b)

What will the value of the whole firm be after this investment (the post-money valuation)?

Problem 23-4 on IRR of Venture Capital Based on Chapter 23

(Excel file included)
Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the
10-year life of the fund, 2% of this committed capital will be used to pay GSBsmanagement fee.

As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less
lifetime management fees). At the end of 10 years, the investments made by the fund are worth $400
million. GSB also charges 20% carried interest on the profits of the fund (net of management fees).
a)
Assuming the $80 million in invested capital is invested immediately and all proceeds were
received at the end of 10 years, what is the IRR of the investments GSB partners made? That is, compute
IRR ignoring all management fees.
b)
Of course, as an investor or limited partner, you are more interested in your own IRR(that is, the
IRR including all fees paid). Assuming that investors gave GSB partners the full $100 million up front,
what is the IRR for GSBs limited partners (that is, the IRR net of all feespaid)?
Problem 23-13 on IPO Based on Chapter 23
Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO.
The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success
with investors, and the share price rises to $50 on the first day of trading.
a)

How much did your firm raise from the IPO?

b)

What is the market value of the firm after the IPO?

c)
Assume that the post-IPO value of your firm is its fair market value. Suppose your firm could
have issued shares directly to investors at their fair market values in a perfect market with no
underwriting spread and no underpricing. What would the share price have been in this case, if you raise
the same amount as in part a)?
d)
Comparing part b) and part c), what is the total cost to the firms original investors due to
market imperfections from the IPO?
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FIN 516 Week 5 Discussion 1

Compare operating and capitalized leases, and also discuss other types of leases.
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FIN 516 Week 5 Discussion 2

How can we compare a non-tax lease to borrowing?
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FIN 516 Week 5 Assignment

Problem 25.6 on Purchase Versus Lease Based on Chapter 25
Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator
will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000
per year for 7 years. Craxtons tax rate is 35%. (Assume the fabricator has no residual value at the end of
the 7 years.)
a)
What are the free cash flow consequences of buying the fabricator if the lease is a true tax
lease?
b)
What are the free cash flow consequences of leasing the fabricator if the lease is a true tax
lease?
c)

What are the incremental free cash flows of leasing versus buying?

Problem 25-7 on Purchase Versus LeaseBased on Chapter 25

Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the
equipment will be depreciated on a straight-line basis over 5 years, after which it will be worthless. If
leased, the annual lease payments will be $55,000 per year for 5 years.
Assume Rivertons borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease.
a)

If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?

b)
loan?

Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent

c)
What is the effective after-tax lease borrowing rate? How does this compare to Rivertons actual
after-tax borrowing rate?
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FIN 516 Week 5 IPO

Select an Initial Public Offering (or a Secondary Offering) completed in the last 10 years in the U.S.
capital markets, and discuss and analyze this IPO in seven- to eight-pages, double-spaced. Each student
should select a separate company as the subject of the paper. This paper should be submitted to the
Week 5 IPO Paper Dropbox.
The paper should discuss the following about the company.
1.

Identify the company and its industry.

2.

Discuss important financial and other facts about the company from its SEC filings.

3.

How successful was the IPO in raising capital?

4.

What has happened to the company since the IPO?

5.

What is the trend in the stock price of the company since the IPO?

Submit your assignment to the Dropbox, located at the top of this page. For instructions on how to use
the Dropbox, read these step-by-step instructions.
See the Syllabus section "Due Dates for Assignments & Exams" for due date information.
Assignment
Complete the Week 5 homework problems.
Chapter 25: 25-6 and 25-7
The problems are also posted in Doc Sharing. These problems should be submitted to the Week 5
Assignments Dropbox. Solutions will be posted to the Assignment Solutions/Answer Keys category in
Doc Sharing after the due date.
Use Excel worksheets or tool kits for submitting all calculation problems.
Submit your assignment to the Dropbox, located at the top of this page. For instructions on how to use
the Dropbox, read these step-by-step instructions.
See the Syllabus section "Due Dates for Assignments & Exams" for due date information.
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FIN 516 Week 6 Discussion 1

Who are the various stakeholders in the mergers and acquisitions process? What may be the potential
impact on each group in a merger and acquisition?
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FIN 516 Week 6 Discussion 2

What factors define synergy in domestic and international mergers and acquisitions? What effect may
this have on finance?
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FIN 516 Week 6 Assignment

Problem 28.9 on Acquisition Analysis Based on Chapter 28 Mergers and Acquisitions
(Excel file included)
Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a
price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares
outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no
expected synergies from the transaction.
a)

If you pay no premium to buy TargetCo, what will your earnings per share be after the merger?

b)
Suppose you offer an exchange ratio such that, at current preannouncement share prices for
both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be
after the merger?
c)
What explains the change in earnings per share in part a)? Are your shareholders any better or
worse off?
d)
What will your price-earnings ratio be after the merger (if you pay no premium)? How does this
compare to your P/E ratio before the merger? How does this compare to TargetCos premerger P/E
ratio?
Problem 16-8 on Managerial DecisionBased on Chapter 16 Financial Distress, Managerial Incentives, and
Information

(Excel file included)

As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of
the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95
million, or $80 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the
risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstones assets will
be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.)
a) What is the initial value of Gladstones equity without leverage?
Now suppose Gladstone has zero-coupon debt with a $100 million face value due next year.
b) What is the initial value of Gladstones debt?
c) What is the yield-to-maturity of the debt? What is its expected return?
d) What is the initial value of Gladstones equity? What is Gladstones total value with leverage?
Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year.
e) If Gladstone does not issue debt, what is its share price?
f) If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchase shares,
what will its share price be? Why does your answer differ from that in part e)?
Problem 16-9 on Financial Distress Based on Chapter 16 Financial Distress, Managerial Incentives, and
Information
Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making
the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5
million shares outstanding, and it has no other assets or opportunities.
Suppose the appropriate discount rate for Kohwesfuture free cash flows is 8%, and the only capital
market imperfections are corporate taxes and financial distress costs.
a) What is the NPV of Kohwes investment?
b) What is Kohwes share price today?
Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year,
and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwes corporate
tax rate is 40%, and expected free cash flows are still $10 million each year.
c) What is Kohwes share price today if the investment is financed with debt?
Now suppose that with leverage, Kohwes expected free cash flows will decline to $9 million per year
due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for
Kohwes future free cash flows is still 8%.

d) What is Kohwes share price today given the financial distress costs of leverage?
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FIN 516 Week 7 Assignment

Problem 31.1 on Exchange Rates based on Chapter 31 International Corporate Finance
(Excel file included)
You are a U.S. investor who is trying to calculate the present value of a 5 million cash inflow that will
occur 1 year in the future. The spot exchange rate is S = $1.25/ and the forward rate is F1 = $1.215/.
You estimate that the appropriate dollar discount rate for this cash flow is 4% and the appropriate euro
discount rate is 7%.
a. What is the present value of the 5 million cash inflow computed by first discounting the euro and
then converting it into dollars?
b. What is the present value of the 5 million cash inflow computed by first converting the cash flow
into dollars and then discounting?
c. What can you conclude about whether these markets are internationally integrated, based on your
answers to parts (a) and (b)?
Problem 31-2 on Currency Appreciation based on Chapter 31 International Corporate Finance
(Excel file included)
Mia Caruso Enterprises, a U.S. manufacturer of childrens toys, has made a sale in Cyprus and is
expecting a C4 million cash inflow in 1 year. The current spot rate is S = $1.80/C and theone-year
forward rate is F1 = $1.8857/C.
a. What is the present value of Mia Carusos C4 million inflow computed by first discountingthe cash
flow at the appropriate Cypriot pound discount rate of 5%, and then converting the result into dollars?
b. What is the present value of Mia Carusos C4 million inflow computed by first converting the cash
flow into dollars, and then discounting at the appropriate dollar discount rate of 10%?
c. What can you conclude about whether these markets are internationally integrated, based on your
answers to parts A and B?
Problem 31-7 on Eurobonds versus Domestic Bondsbased on Chapter 31 International Corporate
Finance

The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of
30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt
because they are considering launching a new bond issue in Tokyo to raise money for a new investment
there.
The risk-free interest rates on dollars and yen are r$ = 5% and r = 1%, respectively. Coval Consulting is
willing to assume that capital markets are internationally integrated and that its free cash flows are
uncorrelated with the yen-dollar spot rate.
What is Coval Consultings after-tax cost of debt in yen? (Hint: Start by finding the after-tax cost of debt
in dollars and then find the yen equivalent.)
Problem 31-12 on Credit & Exchange Rate Risk based on Chapter 31 International Corporate Finance
Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles
per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest
rate is 4.5%, what is the implied credit spread for Russian government bonds?
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FIN 516 Week 8 Final Exam

Question 1. (TCO B) Which of the following statements concerning the MM extension with growth is not
correct?
Question 2.(TCO D) Which of the following statements is most correct?
Question 3. (TCO E) Buster's Beverages is negotiating a lease on a new piece of equipment that would
cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3
years and then sold, because the firm plans to move to a new facility at that time. The estimated value
of the equipment after 3 years is $30,000. If the borrow and purchase option is used, the cash flows
would be the following: (Year 1) -2,400; (Year 2) -3,800; (Year 3) -1,400; (Year 4) -79,600; all of these
cash outflows would be at the beginning of the respective years. Alternatively, the firm could lease the
equipment for 3 years, with annual lease payments of $29,000 per year, payable at the beginning of
each year. The firm is in the 20% tax bracket. If it borrows and purchases, it could obtain a 3-year simple
interest loan, to purchase the equipment at a before-tax interest rate of 10%. If there is a positive net
advantage to leasing, the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?
Question 4. (TCO I) Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1 Canadian dollar
equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the
United States?

Question 5. (TCO C) Dentaltech Inc. projects the following data for the coming year. If the firm follows
the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?
Question 6. (TCO F) Warren Corporation's stock sells for $42 per share. The company wants to sell some
20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each
exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each
warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon
interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?
Question 7. (TCO B) Reynolds Resorts is currently 100% equity financed. The CFO is considering a
recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the
proceeds to repurchase common stock. The recapitalization would not change the company's total
assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that
this recapitalization would reduce the WACC and increase stock price. Which of the following would also
be likely to occur if the company goes ahead with the recapitalization plan?
Question 8. (TCO G) Which of the following statements is most correct?
(a) Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered
since that time.
(b) Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy
are governed solely by state laws.
(c) All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial
distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's
management.
Question 9. (TCO I) In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If
the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar,
what would the car be selling for today in U.S. dollars?
Question 10. (TCO H) Which of the following statements is most correct?
Question 11. (TCO A) An investor who writes standard call options against stock held in his or her
portfolio is said to be selling what type of options?
Question 12. (TCO F) A swap is a method used to reduce financial risk. Which of the following
statements about swaps, if any, is not correct?
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