25765 Corporate Finance

Q1

You estimated Cisco's beta using CAPM. The data used include monthly stock prices of Cisco, monthly market returns and the risk free rates. You used excel function SLOPE to calculate the beta. The estimated beta is unlevered equity beta of Cisco rather than equity beta of Cisco.

1.True

2.Flase

Q2

When doing NPV analysis, we should ignore a cash flow if our decision does not affect it.

1.True

2.Flase

Q3

Assume perfect capital markets. The board of directors of ABC Co is considering two payout policies. The first is to pay out all excess cash as a dividend. The alternative is to use all excess cash to buy back shares. Due to the irrelevance of payout policy, the stock prices immediately after these two payout will be the same.

1.True

2.Flase

Q4

The stock price chart shows the stock price of company ABC since its listing.

1.True

2.Flase

Q5

You took your Mum to a luxury restaurant to celebrate mother's day. By the time the dessert came, you both were full, and the big rich chocolate cake could only hurt your stomachs. But your Mum insisted on eating it because it cost $30. This is an example of the sunk cost fallacy.

1.True

2.Flase

Q6

A project's unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on a pre-tax basis.

1.True

2.Flase

Q7

Since debt is usually cheaper than equity, CEOs can increase their firm value using the cheaper capital, debt, in a perfect capital market.

1.True

2.Flase

Q8

Modigliani and Miller's results continue to hold in a perfect market even when the firm may not be able to pay back its debt.

1.True

2.Flase

Q9

Your company produces and sells steel shaft golf clubs. You are considering the introduction of a new line of titanium woods with graphite clubs. $200,000 has already been spent on R & D last year on graphite shafts. The R & D cost should not be included in free cash flows.

1.True

2.Flase

Q10

When managers think their firms' equity is priced lower than its true value, they perfer to finance investment project using retained earnings or debt. This is known as the signaling theory of debt.

1.True

2.Flase

Q11

The excerpt from a preliminary IPO prospectus shows that an underwriter syndicate is formed to sell the IPO shares.

1.True

2.Flase

Q12

You recently bought some shares from ANZ. ANZ is legally obligated to pay dividends to you.

1.True

2.Flase

Q13

Assume perfect capital markets. You are a shareholder of ABC Co. When ABC Co increases its leverage, you will demand higher return to compensate for the increased financial risk.

1.True

2.Flase

Q14

XYZ Co. and ABC Co. operate in identical business lines, and face the same Rd. If XYZ has a higher financial leverage than ABC, XYZ’s equity beta should be higher than ABC’s.

1.True

2.Flase

Q15

In July 2020, Uber acquired Postmates. It is a vertical takeover.

1.True

2.Flase

Q16

ABC Co. has assets with a market value of $600 million, of which $70 million are cash. It has debt of $250 million and 20 million shares outstanding. Assume perfect capital markets. ABC’s current stock price is $17.50.

1.True

2.Flase

Q17

ABC Co announced that it will pay a dividend of $0.5 per share and the ex-dividend date is October 30, 2020. If you purchase ABC’s shares on October 30, 2020, you can still receive the dividend.

1.True

2.Flase

Q18

ABC Co's D/E ratio is much higher than its peers. Recently it struggled to pay interests on time. During this difficult time, ABC's shareholders have an incentive not to invest and to withdraw money from the firm if possible.

1.True

2.Flase

Q19

ABC Co. announced that it would buy back common shares at $20.15 per share in the next 10 trading days. This repurchase is through a tender offer.

1.True

2.Flase

Q20

A negative-NPV project destroys value for the firm overall.

1.True

2.Flase

Q21

ABC Co. has a market capitalization of $10 billion, and an enterprise value of $15 billion. Its debt cost of capital is 6%, its equity cost of capital is 9%, and its marginal tax rate is 21%. Its free cash flows (FCF) are as follows.

ABC will distribute all FCF as dividends at the end of each year. If ABC maintains its debt-equity ratio, what is the interest tax shield in year 3?

Your Answer:

Q22

You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would receive 2 million newly issued shares in return. What's the post-money valuation of your firm? Assuming that this is the venture capitalist's first investment in your firm, what percentage of the firm will the venture capitalist own? What percentage of the firm will you own?

Your Answer:

Q23

ABC Co. is considering a project with a life of 4 years. The initial investment is $1 million. The tax office allows the investment to be depreciated on a straight-line basis over the life of the project. The project has no market value at the end of 4 years. The sales are expected to be $500,000 per year, and the cost of goods is expected to be $200,000 per year. The tax rate is 21%. The cost of capital is 9%. What is the NPV of this project?

Your Answer:

Q24

XYZ Inc. currently has $100 million in debt outstanding with an 8% interest rate. Under the terms of the loan, XYZ must pay down the balance at year-ends according to the schedule below. For example, XYZ must pay down $10 million of the outstanding debt at the end of Year 1. Year 1: $10 million Year 2: $20 million Year 3: $30 million Year 4: $40 million Suppose τc = 21% and that the appropriate discount rate for interest tax shields is 10%. What is the present value of the interest tax shields from this debt?

Your Answer:

Q25

Use provided data on the exam instruction page to calculate BABA's beta.

Use the prices/returns from January 2016 to December 2018.

Upload the beta calculation excel file.