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Applied Corporate Finance – FINN 400 (01) Name: _______________________

Quiz # 1 - Spring 2017 ID #: ________________


Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.
Questions in the quiz are based on Krispy Kreme Doughnuts (KKD), Inc. case study and assigned reading, “Z- Factor –
Rescue by the Numbers”.

1. Which of the following statements is true?


I. One of the key reasons for problems at KKD was excessive use of debt.
II. Roughly 60% of KKD sales were derived from its signature product, the glazed doughnut.
a. I is true b. II is true
c. both are true d. both are false

2. Krispy Kreme generated the highest proportion of its revenue from:


a. Off premises sales
b. Sale of mixes and doughnut making equipment
c. On premises sales
d. Franchise royalties and fees
e. Online sales

3. Which of the following statements is true?


I. The biggest problem for Krispy Kreme may be that the company grew too quickly and diluted it cult
status by selling doughnuts in too many outlets.
II. According to some analysts KKD management had lost focus on operations as too many units
were opened in poor locations.
a. I is true b. II is true
c. both are true d. both are false

4. Which of the following statements is not true?


a. The company initially claimed that the recent low-carbohydrate diet trend in US has caused the
Krispy’s earnings to decline.
b. Krispy Kreme amortized the purchase cost of its seven Michigan franchise stores over the useful
life of assets.
c. The company declined any wrongdoing initially and claimed that it accounted for its franchise
acquisitions in accordance with generally accepted accounting principles (GAAP).
d. all of the above are not true

5. Which of the following statements is true?


a. By 2005 most analysts covering KKD were making buy recommendations to investors.
b. KKD’s largest competitor in the U. S. was Dunkin’ Donuts for which the majority of sales came from
coffee.
c. KKD IPO in 2000 was one of the largest and successful public offerings.
d. all of the above are true
e. only b and c above are true

6. Which of the following statements is not correct? The statements refer to Z-Factor Rescue by the
Numbers article:
a. Z-score is an overall index of corporate financial health.
b. According to the model, financially strong companies have Z-score between 1.81 and 2.99
c. Of the five financial ratios in the Z-score model, four had total assets in the denominator.
d. Z-score model’s prediction accuracy improves closer to the event
e. more than one statement is not correct
7. Which one of the following ratios is not part of the Z-score model?
a. EBIT/total assets
b. total debt/total assets
c. net working capital/total assets
d. retained earnings/book value of total debt
e. accumulated retained earnings/total assets

8. Which of the following statements is true?


a. The Z-score model was originally developed by Professor Altman as a company turnaround tool.
b. The Z-score model is based on a multivariate statistical method called Multiple Regression Analysis
(MRA).
c. The Z-score model is also known as the brokers tool to help investors in their investment decisions
d. The Z-score model (referred to in the reading) was developed using 33 healthy and 33 bankrupt
companies
d. only b and c above are true
e. only c and d above are true

9. Which of the following statements regarding KKD is not true?


a. KKD stock price plummeted more than 80% from its peak price in August 2003 because of
aggressive accounting treatment revelation about franchise rights reacquisitions made by KKD
and reduction in earnings guidance
b. Off-premises sales were to grocery stores, convenience stores, and a small percentage were sold as private
label.
c. As Krispy Kreme’s fundamentals and accounting treatment became known during the second half of
2004, analyst covering the stock remained optimistic in their recommendations and outlook of the stock.
d. All franchisees were required to buy mixes and equipment from Krispy Kreme which the firm
manufactured and distributed
e. Two of the above are not true.

10. What was the ROE of KKD based on the following ratio data?
 Current Ratio 3.25
 Debt to Equity 11.26%
 Asset to Equity 1.46
 Total Asset Turnover 1.01
 Operating Profit Margin 15.34%
 Net Profit Margin 8.58%
a. 8.66%
b. 12.65%
c. 22.62%
d. none of the above is correct
Applied Corporate Finance – FINN 400 (01) Name: _______________________
Quiz # 1 - Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.
Questions in the quiz are based on Krispy Kreme Doughnuts (KKD), Inc. case study and assigned reading, “Z- Factor –
Rescue by the Numbers”.

1. Krispy Kreme generated the smallest proportion of its revenue from:


a. Off premises sales
b. Sale of mixes and doughnut making equipment
c. On premises sales
d. Franchise royalties and fees
e. Online sales

2. Which of the following statements is true?


a. Krispy Kreme did not amortize the purchase cost of its seven Michigan franchise stores over the
useful life of assets.
b. The company declined any wrongdoing initially and claimed that it accounted for its franchise
acquisitions in accordance with generally accepted accounting principles (GAAP).
c. The company initially claimed that the recent low-carbohydrate diet trend in US has caused the
Krispy’s earnings to decline.
d. all of the above are true
e. Only b and c above are true
3. Which of the following statements is true?
a. By 2005 most analysts covering KKD were making sell recommendations to investors.
b. KKD’s largest competitor in the U. S. was Dunkin’ Donuts for which the majority of sales came from
coffee.
c. Roughly 60% of KKD sales were derived from its signature product, the glazed doughnut.
d. all of the above are true
e. only b and c above are true

4. Which of the following statements is not correct? The statements refer to Z-Factor Rescue by the
Numbers article:
a. Z-score is an overall index of corporate financial health.
b. According to the model, financially strong companies have Z-score greater than 2.99
c. Of the five financial ratios in the Z-score model, four had total assets in the denominator.
d. Z-score model’s prediction accuracy deteriorates closer to the event
e. more than one statement is not correct

5. Which one of the following was the primary reason for KKD stock price to plummet more than 80%
from its peak price in August 2003?
a. excessive borrowing, high leverage
b. inefficient utilization of firm’s assets.
c. declining profit margins over the years
d. revelation of aggressive accounting treatment for franchise rights reacquisitions made by KKD
and reduction in earnings guidance
e. none of the above
6. Which one of the following ratios is not part of the Z-score model?
a. fixed assets/total assets
b. EBIT/total assets
c. net working capital/total assets
d. retained earnings/book value of total debt
e. accumulated retained earnings/total assets

7. Which of the following statements is true?


I. One of the key reasons for problems at KKD was excessive use of leverage.
II. According to some analysts KKD management had lost focus on operations as too many units
were opened in poor locations.
a. I is true
b. II is true
c. both are true
d. both are false

8. Which of the following statements regarding KKD is not true?


a. KKD IPO in 2000 was one of the largest and successful public offerings.
b. Off-premises sales were to grocery stores, convenience stores, and a small percentage were sold as private
label.
c. As Krispy Kreme’s fundamentals and accounting treatment became known during the second half of
2004, analyst covering the stock became increasingly optimistic in their recommendations.
d. All franchisees were required to buy mixes and equipment from Krispy Kreme which the firm
manufactured and distributed
e. Two of the above are not true.

9. What was the ROE of KKD based on the following ratio data?
 Current Ratio 1.39
 Debt to Equity 47.96%
 Asset to Equity 2.20
 Total Asset Turnover 2.10
 Operating Profit Margin 4.92%
 Net Profit Margin 2.70%
a. 8.66%
b. 12.65%
c. 12.47%
d. none of the above is correct

10. Which of the following statements is true?


a. The Z-score model was originally developed by Professor Altman as a bankruptcy prediction tool.
b. The Z-score model is based on a multivariate statistical method called Multiple Discriminant Analysis
(MDA).
c. The Z-score model is also known as the brokers tool to help investors in their investment decisions
d. The Z-score model (referred to in the reading) was developed using 200 healthy and 200 bankrupt
companies
d. only b and c above are true
e. only a, b, and c above are true
Applied Corporate Finance – FINN 400 (01) Name: _______________________
Quiz # 2 - Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements is true?


I. The most critical step in constructing a pro forma financial statements is the sales forecast.
II. A decrease in a firm’s average collection period from 60 to 40 days, other things held constant,
would reduce the additional funds needed requirement.
III. Pro forma statements are used to assess a firm’s historical performance.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

2. Which of the following statements is true? (Source: The Body Shop International case study)
I. Anita Roddick, the founder of The Body Shop, was finance savvy and focused on financial
results of the company.
II. The Body Shop once the fastest growing manufacturer-retailer ran aground in the late 1990s
because of stiff competition from new entrants of the naturally based skin and hair-care products.
a. I is true b. II is true
c. both are true d. both are false

3. Which of the following would reduce the external funds needed for financing the firm’s operations
(other things held constant)?
a. an increase in the dividend payout ratio
b. an increase in the expected growth rate in sales
c. an increase in the net profit margin
d. an increase in the capital intensity ratio (A/S)
e. only b and c above

4. Which of the following statements is true? (Source: The Body Shop International case study)
I. Two classic financial forecasting methods are: T-account forecasting and percentage-of-sale forecasting.
II. One of the circularity problem in preparing pro forma statements arises from the income statement and
balance sheet dependence on each other.
a. I is true b. II is true
c. Both are true d Both are false

5. All of the following current liabilities normally vary with sales (i.e., spontaneous liabilities), EXCEPT
a. accounts payable
b. accrued wages
c. notes payable
d. accrued taxes

6. Which of the following statements is true?


I. In preparing the common size balance sheet, all items on the balance sheet are expressed as a percentage
of sale.
II. ROE can be decomposed into: ROE = net profit margin x receivable turnover x equity multiplier
a. I is true
b. II is true
c. Both are true
d. Both are false
7. Given the following balance sheet, determine the amount of growth that the firm could experience
without needing additional funds (sustainable growth). Current sales are $600, the net profit margins is
5%, and the dividend payout ratio is 25%. Assume the firm is currently operating at full capacity. Hint:
Solve for growth in the AFN equation. [Hint: External Funds Needed (EFN) = (A*/S)S - (L*/S)S
- (NPM)(S1) (1-DPO)]

Cash $ 30 Accounts payable $150


Accounts Receivable 120 Notes payable 15
Inventories 300 Mortgage bonds 225
Net fixed asssets 450 Common stock 75
Retained earnings 450
Total Asset $ 900 Total Liab. & Equity $ 900
a. 3%
b. 4%
c. 5%
d. 6%
e. 7%

Use the following information for the next 2 questions:

Jimmy’s Pizza, Inc., had the following balance sheet last year: (in thousands)

Cash $ 20 Accounts payable $ 20


Accounts Receivable 20 Notes payable 40
Inventories 20 Long term debt 80
Net fixed aswsets 180 Common stock 80
Retained earnings 20
Total Asset $ 240 Total Liab. & Equity $ 240
Sales for the year just ended were $400. Jimmy has invented a fantastic pizza which he expects to
increase sales by $200. Since most of his business is take-out, he feels he can handle the increase
without adding any fixed assets. The profit margin is 5% and dividend payout ratio is 60%.

8. What will be Jimmy’s additional funds requirement (AFN) if his expectations are realized?

EFN = 30 -10 – 12 = $8

9-10. Prepare the pro forma balance sheet for Jimmy’s Pizza. Assume that all external capital requirements are
met by bank loans and are reflected in notes payable.
Applied Corporate Finance – FINN 400 (01)* Name: _______________________
Quiz # 2 - Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements is true?


I. Pro forma statements are used to evaluate a firm’s historical performance.
II. A decrease in a firm’s average collection period from 60 to 40 days, other things held constant,
would reduce the additional funds needed requirement.
III. The most critical step in constructing a pro forma financial statements is the sales forecast.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

2. Which of the following statements is true? (Source: The Body Shop International case study)
I. Anita Roddick, the founder of The Body Shop, was not finance savvy and did not care much
about financial results of the company.
II. The Body Shop once the fastest growing manufacturer-retailer ran aground in the late 1990s
because of stiff competition from new entrants of the naturally based skin and hair-care products.
a. I is true b. II is true
c. both are true d. both are false

3. Which of the following would reduce the external funds needed for financing the firm’s operations
(other things held constant)?
a. an increase in the dividend payout ratio
b. an increase in the expected growth rate in sales
c. an increase in the net profit margin
d. an increase in the capital intensity ratio (A/S)
e. only b and c above

4. Which of the following statements is true? (Source: The Body Shop International case study)
I. Two classic financial forecasting methods are: T-account forecasting and percentage-of-sale forecasting.
II. One of the circularity problem in preparing pro forma statements arises from the income statement and
balance sheet dependence on each other.
a. I is true b. II is true
c. Both are true d Both are false

5. All of the following current liabilities normally vary with sales (i.e., spontaneous liabilities), EXCEPT
a. accounts payable
b. notes payable
c. accrued wages
d. accrued taxes

6. Which of the following statements is true?


I. In preparing the common size income statement, all items on the income statement are expressed as a
percentage of sale.
II. ROE can be decomposed into: ROE = net profit margin x total asset turnover x equity multiplier
a. I is true
b. II is true
c. Both are true
d. Both are false
7. Given the following balance sheet, determine the amount of growth that the firm could experience
without needing additional funds (sustainable growth). Current sales are $600, the net profit margins is
5%, and the dividend payout ratio is 25%. Assume the firm is currently operating at full capacity. Hint:
Solve for growth in the AFN equation. [Hint: External Funds Needed (EFN) = (A*/S)S - (L*/S)S
- (NPM)(S1) (1-DPO)]

Cash $ 30 Accounts payable $150


Accounts Receivable 120 Notes payable 15
Inventories 300 Mortgage bonds 225
Net fixed asssets 450 Common stock 75
Retained earnings 450
Total Asset $ 900 Total Liab. & Equity $ 900
a. 3%
b. 4%
c. 5%
d. 6%
e. 7%

Use the following information for the next 2 questions:

Jimmy’s Pizza, Inc., had the following balance sheet last year: (in thousands)

Cash $ 20 Accounts payable $ 20


Accounts Receivable 20 Notes payable 40
Inventories 20 Long term debt 80
Net fixed aswsets 180 Common stock 80
Retained earnings 20
Total Asset $ 240 Total Liab. & Equity $ 240
Sales for the year just ended were $400. Jimmy has invented a fantastic pizza which he expects to
increase sales by $200. Since most of his business is take-out, he feels he can handle the increase
without adding any fixed assets. The profit margin is 5% and dividend payout ratio is 60%.

8. What will be Jimmy’s additional funds requirement (AFN) if his expectations are realized?

EFN = 30 -10 – 12 = $8

9-10. Prepare the pro forma balance sheet for Jimmy’s Pizza. Assume that all external capital requirements are
met by bank loans and are reflected in notes payable.
Applied Corporate Finance – FINN 400 (01) Name: _______________________
Quiz # 3 - Spring 2017 ID #: ________________
Total Points: 10 (Financial Calculator Quiz)

Use the following information to answer the next four questions.


Use the following information to answer the next four questions.
A firm is considering Projects S and L, whose cash flows (in millions) are shown below. These are mutually exclusive and
equally risky projects. The firm’s WACC for such projects is 13%.
0 1 2 3 4
CFS -1,025 375 380 385 390
CFL -2,150 750 759 768 777

1. What is the NPV of project S and L at the given discount rate?


a. 185.59 and 266.80, respectively
b. 110.47 and 116.94, respectively
c. 266.8 and 116.94, respectively
d. 185.59 and 110.47, respectively
e. none of the above is correct

2. What is the IRR of Project S and L?


a. 15.57% and 18.06%
b. 18.06% and 15.57%
c. 13.27% and 15.57%
d. 18.06 and 13.27%
e. none of the above is correct

3. The CEO wants to use the IRR criterion, while the CFO favors the NPV method, and you were hired to advise the
firm on the best procedure. If the CEO's preferred criterion is used, how much value will the firm lose as a result
of this decision?
a. 81.21 million
b. 6.47 million
c. 75.12 million
d. cannot be determined from the information provided

4. Which of the following statements is true?


I. The IRR of the delta project is higher than the firm’s WACC leading to the same decision as NPV (i.e., select
project L).
II. There is no conflict between NPV and IRR, i.e., both recommend the same project without any adaptation.
a. I is true b. II is true
c. both are true d. both are false

Given the four years return data for the market and Biotech Company, answer the next two questions.
Return Return
Year Biotech Market
% %
2012 20 10
2013 30 20
2014 20 15
2015 10 7
Avg 20 13
5. What is the stock’s beta as a measure of its systematic risk?
a. 0.98
b. 1.33
c. 1.43
d. 1.04
e. none of the above is correct
6. Which of the following statements is true?
I. The standard deviation of the sample data of market returns is about 32.67.
II. Given a risk-free rate of 5 percent and market risk-premium is 8 percent, the required return on Jerry’s
sock will be higher than 13 percent.
a. I only b. II only
c. Both are true d. Both are false

7. A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a par value of $1,000.
The bond is callable in five years at a call price of $1,050. The price of the bond today is $1,075. What is the
bond’s yield to maturity?
a. YTM = 6.88%
b. YTM = 5.88%
c. YTM = 5.43%
d. YTM = 7.14%
e. none of the above is correct

The regression results of Walt Disney Company and the S&P 500 monthly returns are shown below. Use these results to
answer next three questions:

SUMMARY OUTPUT - Walt Disney Company (DIS)


Regression Statistics
Multiple R 0.51748
R Square 0.26779
Adjusted R Square 0.25516
Standard Error 0.08269
Observations 60
ANOVA df SS MS F Significance F
Regression 1 0.14502 0.14502 21.21179 0.00002
Residual 58 0.39654 0.00684
Total 59 0.54156

Coefficients Stand. Error t Stat P-value


Intercept -0.00753 0.01075 0.52961 0.59840
Slope 0.95955 0.20834 2.17561 0.03367

8. Which of the following statements is true?


I. The correlation between the Disney stock return and S&P 500 is 0.26779.
II. The unsystematic risk of Disney stock in percentage terms is about 73 percent.
a. I is true b. II is true
c. both are true d. both are false

9. Which of the following statements is true?


I. Given a one-unit increase in the S&P 500, you would expect about a 0.96 unit increase in the return of
Disney stock.
II. The Disney stock is almost as risky as the overall market based on the slope coefficient of the
characteristic line.
a. I is true b. II is true
c. both are true d. both are false

10. The regression statistics indicate that at the 5 percent level, the slope coefficient
a. and the intercept are both statistically significant
b. and the intercept both lack statistical significance
c. is statistically significant, but the intercept is not statistically significant
d. is not statistically significant, but the intercept is statistically significant.
Applied Corporate Finance – FINN 400 (01)** Name: _______________________
Quiz # 3 - Spring 2017 ID #: ________________
Total Points: 10 (Financial Calculator Quiz)

Use the following information to answer the next four questions.


Use the following information to answer the next four questions.
A firm is considering Projects S and L, whose cash flows (in millions) are shown below. These are mutually exclusive and
equally risky projects. The firm’s WACC for such projects is 10%.
0 1 2 3 4
CFS -1,025 375 380 385 390
CFL -2,150 750 759 768 777

1. What is the NPV of project S and L at the given discount rate?


a. 185.59 and 266.80, respectively
b. 110.47 and 116.94, respectively
c. 266.8 and 116.94, respectively
d. 185.59 and 110.47, respectively
e. none of the above is correct

2. What is the IRR of Project S and L?


a. 15.57% and 18.06%
b. 18.06% and 15.57%
c. 13.27% and 15.57%
d. 18.06 and 13.27%
e. none of the above is correct

3. The CEO wants to use the IRR criterion, while the CFO favors the NPV method, and you were hired to advise the
firm on the best procedure. If the CEO's preferred criterion is used, how much value will the firm lose as a result
of this decision?
a. 81.21 million
b. 6.47 million
c. 75.12 million
d. cannot be determined from the information provided

4. Which of the following statements is true?


I. The IRR of the delta project is higher than the firm’s WACC leading to the same decision as NPV (i.e., select
project L).
II. The different scale of the two projects is resulting in the conflict between NPV and IRR methods.
a. I is true b. II is true
c. both are true d. both are false

Given the four years return data for the market and Biotech Company, answer the next two questions.
Return Return
Year Biotech Market
% %
2012 20 10
2013 30 20
2014 20 15
2015 10 7
Avg 20 13
5. What is the stock’s beta as a measure of its systematic risk?
a. 0.98
b. 1.43
c. 1.33
d. 1.04
e. none of the above is correct
6. Which of the following statements is true?
I. The standard deviation of the sample data of market returns is about 5.72.
II. Given a risk-free rate of 5 percent and market risk-premium is 8 percent, the required return on Jerry’s
sock will be less than 13 percent.
a. I only b. II only
c. Both are true d. Both are false

7. A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a par value of $1,000.
The bond is callable in five years at a call price of $1,050. The price of the bond today is $1,175. What is the
bond’s yield to maturity?
a. YTM = 6.12%
b. YTM = 5.88%
c. YTM = 7.42%
d. YTM = 7.14%
e. none of the above is correct

The regression results of Walt Disney Company and the S&P 500 monthly returns are shown below. Use these results to
answer next three questions:

SUMMARY OUTPUT - Walt Disney Company (DIS)


Regression Statistics
Multiple R 0.51748
R Square 0.26779
Adjusted R Square 0.25516
Standard Error 0.08269
Observations 60
ANOVA df SS MS F Significance F
Regression 1 0.14502 0.14502 21.21179 0.00002
Residual 58 0.39654 0.00684
Total 59 0.54156

Coefficients Stand. Error t Stat P-value


Intercept -0.00753 0.01075 0.52961 0.59840
Slope 0.95955 0.20834 2.17561 0.03367

8. Which of the following statements is true?


I. The correlation between the Disney stock return and S&P 500 is 0.51748.
II. The unsystematic risk of Disney stock in percentage terms is about 73 percent.
a. I is true b. II is true
c. both are true d. both are false

9. Which of the following statements is true?


I. Given a one-unit increase in the S&P 500, you would expect about a 0.268 unit increase in the return of
Disney stock.
II. The Disney stock is almost as risky as the overall market based on the slope coefficient of the
characteristic line.
a. I is true b. II is true
c. both are true d. both are false

10. The regression statistics indicate that at the 5 percent level, the slope coefficient
a. and the intercept are both statistically significant
b. and the intercept both lack statistical significance
c. is statistically significant, but the intercept is not statistically significant
d. is not statistically significant, but the intercept is statistically significant.
Applied Corporate Finance – FINN 400 (Sec 1) Name: _______________________
Quiz # 4 – Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements is true?


I. According to home-made leverage argument, an investor can create the effect of leverage on his/her
account by buying equity of an unlevered firm and borrowing on his/her own account for a desired level
of leverage.
II. Modigliani and Miller Proposition I (world with taxes) states that the market value of any firm is
independent of its capital structure.
a. I is true b. II is true
c. both are true d. both are false

2. Which of the following statements is false? (Source: Deluxe Corporation case study)
a. The primary determinants of a bond rating are the coverage ratio and debt usage.
b. In 2002, Deluxe Corporation’s challenge was to select a mix of debt and equity that allows financial
flexibility to access capital markets in the future while maintaining investment grade bond rating.
c. Deluxe Corporation’s compound annual growth in sales (1998-2001) of around 12% reflected the
growing potential of the market.
d. When firms issue more debt, the tax shield on debt increases, the agency costs on debt (in the form of
financial distress costs) increases, and the agency costs for equity holders decreases because of
disciplining effect.
e. more than one of the above statements are false

3. Which of the following statements is false? (Source: Deluxe Corporation case study)
a. Deluxe Corporation had been aggressively pursuing program of share repurchase which had been well
received by the investors.
b. By 2002, Deluxe Corporation had retired all its outstanding short-term debt in the form of commercial
paper and credit lines, both committed and uncommitted.
c. Deluxe Corporation had leadership position with nearly 50% of the market share in a rapidly maturing
industry.
d. Consolidation in the banking sector and growth in the electronic payments presented tough challenges for
Deluxe to navigate.
e. more than one of the above statements are false

4. Which of the following statements is false?


a. The positive value to the firm by adding debt to the capital structure in the presence of corporate taxes is
due to the extra cash flow going to the investors of the firm rather than the tax authorities.
b. Financial leverage generally increases the expected return and risk of the shareholder.
c. According to MM, in a world without taxes, the optimal capital structure for a firm is approximately 100
percent debt financing.
d. Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk
as measured by its beta coefficient.
e. more than one of the above statements are false

5. Which of the following statements is true?


I. Beta of a levered firm as per Professor Hamada’s equation is: B L = B U [1 + (1 - T)(D/E)]
II. According to Modigliani and Miller Proposition II, the rate of return required by the debt holders
increases as the firm's debt-equity ratio increases.
III. Generally, managers of corporations prefer internally generated funds to finance their capital expenditures
to avoid the discipline of the financial markets.
a. I and II only b. I and III only
c. II and III only d. I, II, and III
6. Which of the following statement is true?
I. Financial leverage has a favourable effect on firm's EPS provided the cost of debt (before tax) is greater
than the firm’s return on assets.
II. The major contribution of Miller's theory is that it demonstrates that personal taxes on debt versus equity
decrease the value of corporate debt tax shield.
a. I is true b. II is true
c. both are true d. both are false

7. Which of the following statement is true?


I. Under MM with corporate taxes, Ke increases with leverage, and this increase is just sufficient to offset the
tax benefits of debt financing.
II. The optimal capital structure has been achieved when the debt-equity ratio is such that the cost of debt
exceeds the cost of equity.
a. I is true b. II is true
c. both are true d. both are false

8. Which of the following statements is false?


a. Under MM with corporate taxes, the value of the levered firm exceeds the value of the unlevered firm by the
product of the tax rate times the market value dollar amount of debt.
b. As bondholders impose various restrictions and covenants (negative and affirmative) to reduce agency
problem, this increases the value of the levered firm.
c. a firm’s Degree of Operating Leverage (DOL) impacts a firm’s level of business risk
d. The higher a firm's business risk, the lower the amount of financial leverage that is appropriate in its
optimal structure, holding all other factors constant.
e. more than one of the above statements are true

9. The pecking order states how financing should be raised. In order to avoid asymmetric information problems and
misinterpretation of whether management is sending a signal on security overvaluation the firm's first rule is to:
a. finance with internally generated funds.
b. always issue debt then the market won't know when management thinks the security is overvalued.
c. issue new equity first.
d. issue debt first.
e. None of the above.

10. HBS is an unleveraged firm with a current beta of 1.0. It is currently considering changing its capital structure to
25% debt to total capital. The firm’s corporate tax rate is 40 percent. The current risk-free rate is 6% and the
market risk premium (Rm – Rf) is 7%. The firm's after-tax cost of debt is estimated to be 4% which is expected to
remain at the same level up to 30% of debt ratio. Should HBS change its current capital structure?
a. yes, cost of capital (WACC) decreases by about 1.6%
b. no, stock price will decrease due to increased risk
c. yes, cost of capital (WACC) decreases by 1.2%
d. no, risk of the firm would increase and decrease the value of the firm
Applied Corporate Finance – FINN 400 (Sec 1)*** Name: _______________________
Quiz # 4 – Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements is true?


I. According to home-made leverage argument, an investor can create the effect of leverage on his/her
account by buying equity of an unlevered firm and borrowing on his/her own account for a desired level
of leverage.
II. Modigliani and Miller Proposition I (world without taxes) states that the market value of any firm is
independent of its capital structure.
a. I is true b. II is true
c. both are true d. both are false

2. Which of the following statements is false? (Source: Deluxe Corporation case study)
a. The primary determinants of a bond rating are the coverage ratio and debt usage.
b. In 2002, Deluxe Corporation was a dominant player in a highly concentrated and competitive online
payment system.
c. In 2002, Deluxe Corporation’s challenge was to select a mix of debt and equity that allows financial
flexibility to access capital markets in the future while maintaining investment grade bond rating.
d. When firms issue more debt, the tax shield on debt increases, the agency costs on debt (in the form of
financial distress costs) increases, and the agency costs for equity holders decreases because of
disciplining effect of debt.
e. more than one of the above statements are false

3. Which of the following statements is false? (Source: Deluxe Corporation case study)
a. Deluxe Corporation had been aggressively pursuing program of share repurchase which had been well
received by the investors.
b. By 2002, Deluxe Corporation had retired all its outstanding short-term debt in the form of commercial
paper and credit lines, both committed and uncommitted.
c. Deluxe Corporation had leadership position with nearly 50% of the market share in a rapidly maturing
industry.
d. Consolidation in the banking sector and growth in the electronic payments presented tough challenges for
Deluxe to navigate.
e. more than one of the above statements are false

4. Which of the following statements is false?


a. The positive value to the firm by adding debt to the capital structure in the presence of corporate taxes is
due to the extra cash flow going to the investors of the firm rather than the tax authorities.
b. Financial leverage generally increases the expected return and risk of the shareholder.
c. According to MM, in a world without taxes, the optimal capital structure for a firm is approximately 100
percent debt financing.
d. Other things held constant, an increase in financial leverage will increase a firm's business risk.
e. more than one of the above statements are false

5. Which of the following statements is true?


I. Beta of a levered firm as per Professor Hamada’s equation is: B L = B U [1 + (1 - T)(D/E)]
II. According to Modigliani and Miller Proposition II, the rate of return required by the stock holders
increases as the firm's debt-equity ratio increases.
III. Generally, managers of corporations prefer internally generated funds to finance their capital expenditures
to avoid the discipline of the financial markets.
a. I and II only b. I and III only
c. II and III only d. I, II, and III
6. The pecking order states how financing should be raised. In order to avoid asymmetric information problems and
misinterpretation of whether management is sending a signal on security overvaluation the firm's first rule is to:
a. finance with internally generated funds.
b. always issue debt then the market won't know when management thinks the security is overvalued.
c. issue new equity first.
d. issue debt first.
e. None of the above.

7. Which of the following statement is true?


I. Financial leverage has a favourable effect on firm's EPS provided the cost of debt (before tax) is greater
than the firm’s return on assets.
II. The major contribution of Miller's theory is that it demonstrates that personal taxes on debt versus equity
increase the value of corporate debt tax shield.
a. I is true b. II is true
c. both are true d. both are false

8. Which of the following statements is false?


a. Under MM with corporate taxes, the value of the levered firm exceeds the value of the unlevered firm by the
product of the tax rate times the market value dollar amount of debt.
b. As bondholders impose various restrictions and covenants (negative and affirmative) to reduce agency
problem, this increases the value of the levered firm.
c. a firm’s Degree of Operating Leverage (DOL) impacts a firm’s level of business risk
d. The higher a firm's business risk, the lower the amount of financial leverage that is appropriate in its
optimal structure, holding all other factors constant.
e. more than one of the above statements are true

9. Which of the following statement is true?


I. Under MM without corporate taxes, Ke increases with leverage, and this increase is just sufficient to offset
the tax benefits of debt financing.
II. The optimal capital structure has been achieved when the debt-equity ratio is such that the cost of debt
exceeds the cost of equity.
a. I is true b. II is true
c. both are true d. both are false

10. HBS is an unleveraged firm with a current beta of 1.0. It is currently considering changing its capital structure to
25% debt to total capital. The firm’s corporate tax rate is 40 percent. The current risk-free rate is 6% and the
market risk premium (Rm – Rf) is 7%. The firm's after-tax cost of debt is estimated to be 4% which is expected to
remain at the same level up to 30% of debt ratio. Should HBS change its current capital structure?
a. yes, cost of capital (WACC) decreases by about 1.2%
b. no, stock price will decrease due to increased risk
c. yes, cost of capital (WACC) decreases by 1.6%
d. no, risk of the firm would increase and decrease the value of the firm
Applied Corporate Finance – FINN 400 (Sec 1) Name: _______________________
Quiz # 5 – Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements about leasing is true?


I. A leveraged lease is more risky from the lessee’s standpoint than is an unleveraged lease.
II. The full amount of a lease payment is tax deductible if the contract is a genuine operating lease.
a. I is true
b. II is true
c. both are true
d. both are false

2. Which of the following statements is true?


I. Operating leases help to pass the risk of obsolescence from the user to the lessor.
II. Firm X sold the office building and used the proceeds to improve its financial position. The firm then
leased the building back in order to continue to use the facilities. This is an example of a leveraged lease.
a. I is true
b. II is true
c. both are true
d. both are false

3. Which of the following statements is true?


I. In the lease versus buy decision, leasing is often preferable because lease obligations do not affect
the financial risk of the firm.
II. Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure,
in an amount sufficient to support the lease payment obligation.
a. I is true
b. II is true
c. Both are true
d. Both are false

4. Which of the following statements is true?


I. If the IRR is higher than the after-tax cost of borrowing (in the NAL analysis), leasing is beneficial from
the lessee perspective.
II. In a sale and leaseback arrangement, the lessee receives cash from the sale of the asset and continues
to use the asset.
a. I is true
b. II is true
c. Both are true
d. Both are false

5. Which of the following statements about leasing is true?


I. A lease is likely to be less beneficial to a lessee whose borrowing cost is lower than the lessor’s
borrowing cost, holding all else constant.
II. If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose
of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a
lower lease rate because the asset does not have a positive residual value.
a. I is true
b. II is true
c. Both are true
d. Both are false
Use the following information to answer the next five question:
Your firm is considering leasing a new robotic milling control system. The lease lasts for 3 years. The
lease calls for 3 payments of $210,000 per year with the first payment occurring at lease inception. The
system would cost $500,000 to buy and would be depreciated using MACRS 3-year asset category. The
lessor is willing to provide free maintenance. However, if the asset was purchased the manufacturer will
write the maintenance contract at a cost of $50,000 per year. The salvage value at the end of year 3 is
estimated to be 12% of the original cost of system. The firm can borrow at 13.81% before-tax, and the
corporate tax rate is 30%. The firm’s overall cost of capital (WACC) is 17%. (MACRS 3-Year Asset
Depreciation percentages: Year1 = 33%; Year2 = 45%; Year3 = 15%; Year4 = 7%)

6. What is the amount of depreciation tax-shield in year 3 in your analysis of NAL?


a. -$22,500
b. -$180,000
c. -$75,000
d. -$30,000
e. none of the above is correct

7. What is the relevant amount net salvage value at the end of year-3?
a. -$60,000
b. -$70,000
c. -$87,000
d. -$12,000
e. none of the above is correct

8. What is the total net cash flow at the end of year 2?


a. -$70,000
b. -$74,500
c. -$186,000
d. -$179,500
e. none of the above is correct

9. Should the asset be leased or bought?


a. lease the asset since the NAL is significantly positive
b. buy the asset since the NAL is negative
c. buy the asset since the IRR is less than the after-tax cost of borrowing.
d. leasing or borrow-buy are equivalent, since the NAL is close to zero

10. If the borrowing cost of the lessee increased from 13.81 to 15%, the NAL will:
a. increase
b. decrease
c. remain unchanged because of the offsetting effects
d. cannot be determined based on the information provided
Applied Corporate Finance – FINN 400 (Sec 1)** Name: _______________________
Quiz # 5 – Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements about leasing is true?


I. A leveraged lease is more risky from the lessee’s standpoint than is an unleveraged lease.
II. The full amount of a lease payment is tax deductible if the contract is a genuine financial lease.
a. I is true
b. II is true
c. both are true
d. both are false

2. Which of the following statements is true?


I. If the IRR is higher than the after-tax cost of borrowing (in the NAL analysis), leasing is beneficial from
the lessee perspective.
II. Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure,
in an amount sufficient to support the lease payment obligation.
a. I is true
b. II is true
c. Both are true
d. Both are false

3. Which of the following statements is true?


I. Capital leases help to pass the risk of obsolescence from the user to the lessor.
II. If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose
of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a
lower lease rate because the asset does not have a positive residual value.
a. I is true
b. II is true
c. both are true
d. both are false

4. Which of the following statements is true?


I. In the lease versus buy decision, leasing is often preferable because lease obligations do not affect
the financial risk of the firm.
II. In a sale and leaseback arrangement, the lessee receives cash from the sale of the asset and continues
to use the asset.
a. I is true
b. II is true
c. Both are true
d. Both are false

5. Which of the following statements about leasing is true?


I. A lease is likely to be less beneficial to a lessee whose borrowing cost is lower than the lessor’s
borrowing cost, holding all else constant.
II. Firm X sold the office building and used the proceeds to improve its financial position. The firm then
leased the building back in order to continue to use the facilities. This is an example of a leveraged lease.
a. I is true
b. II is true
c. Both are true
d. Both are false
Use the following information to answer the next five question:
Your firm is considering leasing a new robotic milling control system. The lease lasts for 3 years. The
lease calls for 3 payments of $210,000 per year with the first payment occurring at lease inception. The
system would cost $500,000 to buy and would be depreciated using MACRS 3-year asset category. The
lessor is willing to provide free maintenance. However, if the asset was purchased the manufacturer will
write the maintenance contract at a cost of $50,000 per year. The salvage value at the end of year 3 is
estimated to be 15% of the original cost of system. The firm can borrow at 14.0% before-tax, and the
corporate tax rate is 40%. The firm’s overall cost of capital (WACC) is 17%. (MACRS 3-Year Asset
Depreciation percentages: Year1 = 33%; Year2 = 45%; Year3 = 15%; Year4 = 7%)

6. What is the amount of depreciation tax-shield in year 3 in your analysis of NAL?


a. -$22,500
b. -$180,000
c. -$75,000
d. -$30,000
e. none of the above is correct

7. What is the relevant amount net salvage value at the end of year-3?
a. -$60,000
b. -$70,000
c. -$87,000
d. -$12,000
e. none of the above is correct

8. What is the total net cash flow at the end of year 2?


a. -$70,000
b. -$74,500
c. -$186,000
d. -$179,500
e. none of the above is correct

9. Should the asset be leased or bought?


a. lease the asset since the NAL is significantly positive
b. buy the asset since the NAL is negative
c. buy the asset since the IRR is less than the after-tax cost of borrowing.
d. leasing or borrow-buy are equivalent, since the NAL is close to zero

10. If the borrowing cost of the lessee increased from 13.81 to 15%, the NAL will:
a. increase
b. decrease
c. remain unchanged because of the offsetting effects
d. cannot be determined based on the information provided
Applied Corporate Finance – FINN 400 (Sec 1) Name: _______________________
Quiz # 6 – Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements is true?


I. One advantage of adopting the residual dividend policy is that this policy makes it easier for
corporations to develop a specific and stable dividend seeking clientele.
II. Differential taxation of dividends and capital gains generally creates a bias against payment of dividends.
a. I is true b. II is true
c. both are true d. both are false

2. Which of the following statements is true?


I. The observed empirical fact that stocks attract particular investors based on the firm's dividend
policy and the resulting tax impact on investors is called the signaling effect.
II. The net effect of stock repurchase is similar to cash dividends, ignoring differences in tax treatment.
a. I is true b. II is true
c. both are true d. both are false

3. Which of the following statements is true?


I. According to residual dividend policy, if a firm’s optimal capital budget requires the use of all
earnings along with debt according to target weights – the firm should borrow funds to pay
dividends.
II. When a company declares a stock split, the price of the stock typically declines by about 50%
after a 2-for-1 split and this necessarily reduces the total market value of the equity.
a. I is true b. II is true
c. both are true d. both are false

4. One possible reason that shareholders often insist on higher dividends is:
a. They agree with Gordon and Lintner view
b. Tax considerations
c. The stock market is efficient
d. They do not trust managers to spend retained earnings wisely

5. Which of the following statements is true?


a. Financial managers generally prefer cutting dividends when earnings decline instead of
borrowing funds to maintain the established dividend.
b. Compared to stock splits, stock dividends are generally used when a significant price change is desired.
c. “Bird-in-the-hand” view of dividend (Gordon and Lintner) suggests that the market value of the firm is
affected by its dividend payout.
d. According to M&M changes in dividends can be interpreted as a signal from management about the
future prospect of the company and its earnings.
e. more than one of the above statements are true

6. ABC Corporation declares as 10% stock dividend (bonus shares) when the market value of its shares exceed the
par value. The effect of stock dividend on the following balance sheets accounts will be:

Common Stock Capital Surplus Retained Earning Total Equity


a. Decrease Decrease Decrease Decrease
b. Increase Increase Decrease No change
c. Increase No change Decrease No change
d. Increase Increase No change No change
Use the following questions to answer the next 4 questions:
You are given the following data for the Delta Corporation. You believe that after 4 years, the firm’s cash flows
and dividends will grow at 5% per year forever. Delta has a beta of 1.5, the risk-free rate is 5%, and the expected
return to the market is 15%. The corporate tax rate is 30% and the firm’s debt is selling at par value with a coupon
rate of 12%. The capital structure of the firm is 50% debt and 50% equity. Total interest expense and dividends
paid are listed below. Firm’s total debt (net of cash) is estimated at $2,000. Non-operating cash is negligible.

All data in ’000


Year EBIT Depreciation Additions Capex Interest Dividends
to W/C Expense
2011 200 90 10 40 20 10
2012 220 100 15 45 22 11
2013 240 110 20 50 24 12
2014 260 120 25 55 26 13

7. What is the appropriate discount rate to determine the Enterprise Value (EV)?
a. 20.0%
b. 14,2%
c. 17.0%
d. 12.0%
e. none of the above is correct

8. What is the projected amount of FCFF (in ‘000) for year 3?


a. $280
b. $208
c. $196
d. $191.2
e. none of the above is correct

9. What is your estimate of the Terminal Value (in ‘000) at the end of year 4?
a. $2,534
b. $2,413
c. $3,330
d. $3,171
e. none of the above is correct

10. What is the firm’s total equity value (in ‘000) based on your FCFF analysis?
a. $2,066
b. $2,721
c. $721
d. $4,066
e. none of the above is correct
Applied Corporate Finance – FINN 400 (Sec 1)** Name: _______________________
Quiz # 6 – Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements is true?


I. One advantage of adopting the residual dividend policy is that this policy makes it easier for
corporations to develop a specific and stable dividend seeking clientele.
II. According to M&M changes in dividends can be interpreted as a signal from management about the
future prospect of the company and its earnings.
a. I is true b. II is true
c. both are true d. both are false

2. Which of the following statements is true?


I. The observed empirical fact that stocks attract particular investors based on the firm's dividend
policy and the resulting tax impact on investors is called the clientele effect.
II. The net effect of stock repurchase is similar to cash dividends, ignoring differences in tax treatment.
a. I is true b. II is true
c. both are true d. both are false

3. Which of the following statements is true?


I. According to residual dividend policy, if a firm’s optimal capital budget requires the use of all
earnings along with debt according to target weights – the firm should pay no dividends.
II. When a company declares a stock split, the price of the stock typically declines by about 50%
after a 2-for-1 split and this necessarily reduces the total market value of the equity.
a. I is true b. II is true
c. both are true d. both are false

4. Possible reasons why high net worth investors often insist on higher dividends, because:
a. they agree with Gordon and Lintner view
b. they do not trust managers to spend retained earnings prudently
c. of tax reasons
d. stock market is efficient
e. both b and c above

5. Which of the following statements is true?


a. Financial managers generally prefer cutting dividends when earnings decline instead of
borrowing funds to maintain the established dividend.
b. Compared to stock splits, stock dividends are generally used when a significant price change is desired.
c. “Bird-in-the-hand” view of dividend (Gordon and Lintner) suggests that the market value of the firm is
affected by its dividend payout.
d. Differential taxation of dividends and capital gains generally creates a bias in favor of dividend payments.
e. more than one of the above statements are true

6. ABC Corporation declares as 10% stock dividend (bonus shares) when the market value of its shares exceed the
par value. The effect of stock dividend on the following balance sheets accounts will be:

Common Stock Capital Surplus Retained Earning Total Equity


a. Decrease Decrease Decrease Decrease
b. Increase No change Decrease No change
c. Increase Increase Decrease No change
d. Increase Increase No change No change
Use the following questions to answer the next 4 questions:
You are given the following data for the Delta Corporation. You believe that after 4 years, the firm’s cash flows
and dividends will grow at 5% per year forever. Delta has a beta of 1.2, the risk-free rate is 5%, and the expected
return to the market is 15%. The corporate tax rate is 30% and the firm’s debt is selling at par value with a coupon
rate of 10%. The capital structure of the firm is 50% debt and 50% equity. Total interest expense and dividends
paid are listed below. Firm’s total debt is estimated at $2,000. Non-operating cash is negligible.

All data in ’000


Year EBIT Depreciation Additions Capex Interest Dividends
to W/C Expense
2011 200 90 10 40 20 10
2012 220 100 15 45 22 11
2013 240 110 20 50 24 12
2014 260 120 25 55 26 13

7. What is the appropriate discount rate to determine the Enterprise Value (EV)?
a. 20.0%
b. 14,2%
c. 17.0%
d. 12.0%
e. none of the above is correct

8. What is the projected amount of FCFF (in ‘000) for year 3?


a. $280
b. $208
c. $196
d. $191.2
e. none of the above is correct

9. What is your estimate of the Terminal Value (in ‘000) at the end of year 4?
a. $2,534
b. $2,413
c. $3,330
d. $3,171
e. none of the above is correct

10. What is the firm’s total equity value (in ‘000) based on your FCFF analysis?
a. $2,066
b. $2,721
c. $721
d. $4,066
e. none of the above is correct
Applied Corporate Finance – FINN 400 (01) Name: _______________________
Quiz # 7 - Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which one of the following is not an advantage of going public?


a. allows a firm’s founders to diversify their holdings
b. increases the liquidity of the holder’s stock
c. makes it easier to raise new equity capital
d. establishes market price of firm’s stock for estate taxes
e. all of the above are advantages of going public

2. Which of the following statement is incorrect?


a. empirical evidence on IPOs suggests that new equity issues are generally underpriced
b. an equity issue sold directly to the general public is called private placement
c. an equity issue sold to the firm's existing stockholders is called a rights offer
d. a new public equity issue from a company with equity previously outstanding is called a
seasoned equity offer (SEO).
e. more than one of the above statements are not correct

3. Which of the following statements is true?


I. Shares of stock that have been repurchased by the corporation are called treasury stock.
II. Under the firm commitment method, the underwriter buys the securities for less than the offering
price and accepts the risk of not selling the issue, while under the best efforts method, the
underwriter does not purchase the shares but merely acts as an agent.
a. I is true
b. II is true
c. both are true
d. both are false

4. Investment banks perform which of the following services for corporate issuers:
a. advising and formulating the method used to issue securities.
b. pricing the new securities.
c. selling the new securities.
d. All of the above.
e. only a and b above

5. Which of the following statements is true?


I. A lock-up arrangement is a legally binding contract between the underwriters and insiders of a company
prohibiting these individuals from selling any shares of stock for a specified period of time.
II. Assuming everything else is constant, when a stock goes ex-rights its price should decrease since the
stockholder is losing an option.
a. I is true b. II is true
c. both are true d. both are false

6. Which of the following statements is true?


I. The green shoe option is used by investment bankers to cover undersubscription of an issue.
II. Book Building is the process by which an underwriter attempts to determine at what price to offer an IPO
based on demand from institutional investors.
a. I is true b. II is true
c. both are true d. both are false
7. Which of the following statements is true?
I. Quiet period refers to period when the company is totally prohibited from advertising.
II. Only qualified investors can participate in the book building process.
a. I is true b. II is true
c. both are true d. both are false

8. Which of the following statements is true?


I. Companies use tombstone advertisements in the financial press to announce potential bankruptcy of a
company.
II. The “bake off meeting” is generally held at the end of the IPO process to assess the success of the
process.
a. I is true
b. II is true
c. both are true
d. both are false

Use the following information to answer the next two questions


A firm plans to raise $2 million through a rights offering. The firm currently has 250,000 shares
outstanding, which have a market value of $42 per share. The firm has set the subscription price for the
rights at $40 per share.

9. What is the number of rights needed to buy on new share?


a. 2
b. 3
c. 4
d. 5
e. none of the above

10. What is the approximate value of a right?


a. $5.00
b. $1.25
c. $0.33
d. $0.40
e. none of the above
Applied Corporate Finance – FINN 400 (01)** Name: _______________________
Quiz # 7 - Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which of the following statements is true?


I. Companies use tombstone advertisements in the financial press to announce the initial public offering of
the issue with information about the underwriters of the issue.
II. The “bake off meeting” is generally held at the end of the IPO process to assess the success of the
process.
a. I is true
b. II is true
c. both are true
d. both are false

2. Which of the following statements is true?


I. Quiet period refers to period when the company is prohibited from unusual advertising to create a hype
about the issue.
II. Only qualified investors can participate in the book building process.
a. I is true b. II is true
c. both are true d. both are false

3. Which of the following statement is incorrect?


a. empirical evidence on IPOs suggests that new equity issues are generally fairly priced
b. an equity issue sold directly to the general public is called private placement
c. an equity issue sold to the firm's existing stockholders is called a rights offer
d. a new public equity issue from a company with equity previously outstanding is called a
seasoned equity offer (SEO).
e. more than one of the above statements are not correct

3. Which of the following statements is true?


I. Shares of stock that have been repurchased by the corporation are called bonus shares.
II. Under the firm commitment method, the underwriter buys the securities for less than the offering
price and accepts the risk of not selling the issue, while under the best efforts method, the
underwriter does not purchase the shares but merely acts as an agent.
a. I is true
b. II is true
c. both are true
d. both are false

5. Which of the following statements is true?


I. A lock-up arrangement is a legally binding contract between the underwriters and insiders of a company
prohibiting these individuals from selling any shares of stock for a specified period of time.
II. Assuming everything else is constant, when a stock goes ex-rights its price should increase since the
stockholders have additional shares.
a. I is true b. II is true
c. both are true d. both are false

6. Which of the following statements is true?


I. The green shoe option is used by investment bankers to cover oversubscription of an issue.
II. Book Building is the process by which an underwriter attempts to determine at what price to offer an IPO
based on demand from institutional investors.
a. I is true b. II is true
c. both are true d. both are false
7. Investment banks perform which of the following services for corporate issuers:
a. advising and formulating the method used to issue securities.
b. pricing the new securities.
c. selling the new securities.
d. All of the above.
e. only a and b above

8. Which one of the following is not an advantage of going public?


a. allows a firm’s founders to diversify their holdings
b. increases the liquidity of the holder’s stock
c. makes it easier to raise new equity capital
d. establishes market price of firm’s stock for estate taxes
e. all of the above are advantages of going public

Use the following information to answer the next two questions


A firm plans to raise $2 million through a rights offering. The firm currently has 300,000 shares
outstanding, which have a market value of $30 per share. The firm has set the subscription price for the
rights at $20 per share.

9. What is the number of rights needed to buy on new share?


a. 2
b. 3
c. 4
d. 5
e. none of the above

10. What is the approximate value of a right?


a. $5.00
b. $2.50
c. $0.44
d. $0.33
e. none of the above
Applied Corporate Finance – FINN 400 (Sec 1) Name: _______________________
Quiz # 8 - Spring 2017 ID #: ________________
Total Points: 10

SELECT THE SINGLE BEST ANSWER. USE A CIRCLE TO INDICATE YOUR CHOICE.

1. Which one of the following statements is correct?


I. In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are
generally divided equally between the shareholders of the acquiring and target firms.
II. A congeneric merger is one where the merging firms operate in related businesses but do not necessarily
produce the same products or have a producer-supplier relationship.
a. I is true b. II is true
c. both are true d. both are false

2. Which one of the following statements is correct?


I. The defense tactics used by companies to ward off unfriendly mergers (aka shark repellents) typically
protect the interests of a company’s management more than its shareholders.
II. Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new
subsidiary separately could be described as primarily a financial merger rather than an operating merger.
a. I is true b. II is true
c. both are true d. both are false

3. Which one of the following statements is correct?


I. The primary rationale for most operating mergers as opposed to financial mergers is synergy.
II. Managers often suggest diversification including more stable earnings as a motivation for merger.
However, since shareholders are free to diversify their own holdings, and at a lower cost, diversification
benefits is generally not a valid motive for a publicly held firm.
a. I is true b. II is true
c. both are true d. both are false

4. Which one of the following statements is correct?


I. A “Poison Put” allows target shareholders the opportunity to redeem their shares at a substantial premium
to the current market value.
II. In a tax-free acquisition only shares are exchanged, while in a taxable transaction the shares are
considered sold for cash and realized capital gains or losses are taxed.
a. I is true b. II is true
c. both are true d. both are false

5. Firm A has a value of $200 million, and T has a value of $120 million. Merging the two would allow a cost
saving synergies with a present value of $30 million. Firm A purchases T for $130 million. How much do firm
A's shareholders gain from this merger?
a. $30 million
b. $20 million
c. $15 million
d. $10 million

6. Which one of the following statements is correct?


I. The purchase accounting method for mergers require that the assets of the target firm be recorded at their
fair market value on the balance sheet of the acquiring firm which may lead to creation of another asset
item called “Good Will”.
II. The discount rate used to value merger cash flows should be the cost of capital of the new combined firm
because it incorporates the actual capital structure of the merged firms.
a. I is true b. II is true
c. both are true d. both are false
7. Which one of the following statements is correct?
I. “Bootstrapping” is a technique whereby a low P/E company acquires a high P/E target in a stock offering
with a view to boost reported EPS of the combined firm.
II. When a dissident group solicits votes in an attempt to acquire the target firm, this is called a tender offer.
a. I is true b. II is true
c. both are true d. both are false

8. Which one of the following statements is not correct?


a. A merger through acquisition of stocks requires a formal vote of approval by target company
shareholders/BoD.
b. A tender offer is most likely to be used during a friendly merger attempt.
c. When the acquiring firm directly makes the merger proposal to the board of the target firm instead of the
company management, this is referred to as the “Beer Hug”.
d. A merger in which an entirely new firm is created and both the acquired and acquiring firm names cease
to exist is called consolidation.
e. more than one of the above statements re not correct

9. Which of the following statements is not true?


a. Stock-based insolvency is an income statement measurement.
b Successful private workouts are better for firms than formal bankruptcy because direct costs are
considerably lower in private workouts.
c. The key difference between liquidation and reorganization is reorganization terminates all operations of
the firm and liquidation only terminates non-profitable operations.
d. Responses to financial distress include: asset restructuring, financial restructuring
e. more than one of the above statements are not true

10. Which of the following statements is true?


I. As part of financial restructuring “haircuts”, senior debt may be replaced with junior debt and
subordinated debt replaced with equity.
II. When a corporation is adjudged bankrupt under Chapter 7, shareholders generally receive the payment
after the trustee liquidate the assets before other claimants because they are the owners of the firm.
a. I is true
b. II is true
c. both are true
d. both are false
Applied Corporate Finance – FINN 400 (Sec 1)** Name: _______________________
Quiz # 8 - Spring 2017 ID #: ________________
Total Points: 10

1. Which one of the following statements is correct?


I. The defense tactics used by companies to ward off unfriendly mergers (aka shark repellents) typically
protect the interests of a company’s management more than its shareholders.
II. A congeneric merger is one where the merging firms operate in related businesses but do not necessarily
produce the same products or have a producer-supplier relationship.
a. I is true b. II is true
c. both are true d. both are false

2. Which of the following statements is not true?


a. Stock-based insolvency is an income statement measurement.
b Successful private workouts are better for firms than formal bankruptcy because direct costs are
considerably lower in private workouts.
c. The key difference between liquidation and reorganization is reorganization terminates all operations of
the firm and liquidation only terminates non-profitable operations.
d. Responses to financial distress include: asset restructuring, financial restructuring
e. more than one of the above statements are not true

3. Which of the following statements is true?


I. As part of financial restructuring “haircuts”, senior debt may be replaced with junior debt and
subordinated debt replaced with equity.
II. When a corporation is adjudged bankrupt under Chapter 7, shareholders generally receive the payment
after the trustee liquidate the assets before other claimants because they are the owners of the firm.
a. I is true
b. II is true
c. both are true
d. both are false

4. Which one of the following statements is correct?


I. In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are
generally divided equally between the shareholders of the acquiring and target firms.
II. Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new
subsidiary separately could be described as primarily a financial merger rather than an operating merger.
a. I is true b. II is true
c. both are true d. both are false

5. Which one of the following statements is not correct?


a. A merger through acquisition of stocks requires a formal vote of approval by target company
shareholders/BoD.
b. A tender offer is most likely to be used during a friendly merger attempt.
c. When the acquiring firm directly makes the merger proposal to the board of the target firm instead of the
company management, this is referred to as the “Beer Hug”.
d. A merger in which an entirely new firm is created and both the acquired and acquiring firm names cease
to exist is called consolidation.
e. more than one of the above statements re not correct

6. Which one of the following statements is correct?


I. The primary rationale for most operating mergers as opposed to financial mergers is synergy.
II. Managers often suggest diversification including more stable earnings as a motivation for merger.
However, since shareholders are free to diversify their own holdings, and at a lower cost, diversification
benefits is generally not a valid motive for a publicly held firm.
a. I is true b. II is true
c. both are true d. both are false
7. Which one of the following statements is correct?
I. A “Poison Put” allows target shareholders the opportunity to redeem their shares at a substantial premium
to the current market value.
II. In a tax-free acquisition only shares are exchanged, while in a taxable transaction the shares are
considered sold for cash and realized capital gains or losses are taxed.
a. I is true b. II is true
c. both are true d. both are false

8. Which one of the following statements is correct?


I. The purchase accounting method for mergers require that the assets of the target firm be recorded at their
fair market value on the balance sheet of the acquiring firm which may lead to creation of another asset
item called “Good Will”.
II. The discount rate used to value merger cash flows should be the cost of capital of the new combined firm
because it incorporates the actual capital structure of the merged firms.
a. I is true b. II is true
c. both are true d. both are false

9. Firm A has a value of $200 million, and T has a value of $120 million. Merging the two would allow a cost
saving synergies with a present value of $30 million. Firm A purchases T for $130 million. How much do firm
A's shareholders gain from this merger?
a. $30 million
b. $20 million
c. $15 million
d. $10 million

10. Which one of the following statements is correct?


I. “Bootstrapping” is a technique whereby a low P/E company acquires a high P/E target in a stock offering
with a view to boost reported EPS of the combined firm.
II. When a dissident group solicits votes in an attempt to acquire the target firm, this is called a proxy fight.
a. I is true
b. II is true
c. both are true
d. both are false