WK 8 FINAL EXAM STUDY GUIDE • The exam is comprehensive and covers Chapters 8, 14, 15, 17-23, 25, and 26; Weeks 1-7 content; and all course TCOs. 1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT? (a) The tax shields should be discounted at the unlevered cost of equity. (b) The value of a growing tax shield is greater than the value of a constant tax shield. (c) 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. (d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions. (e) The total value of the firm is independent of …show more content…
(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? (a) 7.83%
(b) 8.24%
(c) 8.65%
(d) 9.08%
(e) 9.54% (Points : 20)
3. (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
| How would your answer to (a) change if you anticipated no growth in cash flow? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
* b.Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.)
Solution – QUESTION 2 (written by Asher Curtis) - 10 Marks Suggestions only: 1. (3 marks for identifying the three dimensions) Applications of cost and equity differ on three dimensions. First, the treatment of dividends, is written against the investment account (Equity) or recognised as revenue (Cost). Second, the treatment of profits reported by the associated entity and the ammortisation of goodwill (the difference in the cost paid and the fair value of the net assets acquired) are not recognised when applying the cost method. The only case where net profit is not affected by choice of the method is where there is no goodwill (cost = fair value of net assets acquired) and the firm pays out all of its profit as dividends. Any of the following alternatives provide examples (2 marks for any of the following): a. The case for a profitable company that pays less than 100% profits out as dividends: The net value of the investment increases under the equity method, which will be more than cost unless the investment is revalued. b. The case for a loss company that pays no dividends: Unless the investment is subject to a recoverable amount test, application of the equity method
is unique to the individual investor and need not be closely related to market value or most probable selling price.
| (TCO A) Domino's upgraded Pulse Evolution system incorporated a Pizza Tracker functionality that shows the progression of individual pizza orders. This is an example of using information systems to achieve which business objective?
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
There are 2 parts to the exam – a case with questions and some general questions. Remember:
The exam does not include: Lecture Area 1-4 Lecture Area 9 [Week 10] (Takeovers / Financial Services and Markets) The Role of Auditors / ASIC Investigation (these are both in Lecture Area 7 [Week 8]) Everything else is examinable – that is, within the range of material that may be included in the final exam Part A of the exam (20 marks) is multiple-choice (10 x 2 marks per question) Part B of the exam (40 marks) has 2 problem style questions requiring written responses (15 marks each) and 1 short answer style question (with 5 questions worth 2 marks each). Look at the Unit Guide and the Assessment Guide Also on iLearn are: Coversheet for the exam Practice Questions Answer Guide to Practice Questions
On April 1, 2010, BGL Ltd. issued $600,000, 9% bonds (dated January 1, 2010) for $645,442, including accrued interest. Interest is payable
A. after the third year net income would always be higher if it is capitalized.
1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key assumptions that you made in computing the WACC. 2. What is the cost of capital for the lodging and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made in computing the cost of capital and outline any limitations that are presented by your analysis. 3. If Marriot uses a single company-wide cost of capital for evaluating investment opportunities in each of its line of business, what do you think will happen to the company over time? 4. Briefly describe how each of the following events will likely impact Marriot’s cost of capital: (a) An increase in the long-term T-Bond rate by 2%. (b) Increased
Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
* Please choose either the CAPM estimate or the DDM estimate for cost of equity based on your answer to Question 3.
1 2 COURSE MATERIAL THE EXAMINATION 2.1 2.2 2.3 3 4 Admission to the examination Learning content for the examination The examination paper: layout, duration and total marks 3 3 3 3 4 4 4 4 6 6 8 11