corporate finance

 Name:____________________   Name:_____________ _______ 

MAN 321 Corporate Finance Final Examination Fall 2001

There are three sections on this examination. Section I contains 10 fill-in-the-blanks questions. Answer these questions b enterin! our answer in the blanks. Section II has 10 multi"le multi"le choice questions. #nter our answers b circlin! the a""ro"riate letter on the exam. Section II contains $ "roblems. Answer the "roblems in the s"aces  "ro%i&e& on the exam. 'oo& luck  lu ck  SECTION I. Fill-in-the-blan! Fill-in-the-blan! "#e!tion! (1 "oint each)

1. A(n) _____bon&_________ _____bon&_________ is a lon!-term "romissor "romissor note note issue& issue& b a business business firm or !o%ernmental unit. *. The state& state& face face %alue %alue of a bon& is referre referre& & to as its _"ar_%a _"ar_%alue. lue. +. The &ate &ate at which which the face %alue %alue of a bon& is is re"ai& to each bon&hol&er is known as the __maturit_ __&ate__. ,. arket interest rates an& bon& "rices "rices mo%e mo%e in _o""osite____ _o""osite____ &irections &irections from one another. $. ike other other financial financial assets/ assets/ the the %alue of common common stock is the __"resent_ __"resent__ _ %alue of a future stream of income. . The income income stream stream ex"ecte& ex"ecte& from a common common stock consists of a(n) _&i%i&en&___ _&i%i&en&___ iel& an& a(n) _ca"ital__ __!ains_ iel&. . 2inanci 2inancial al le%era! le%era!ee refers refers to the use of __&ebt __&ebt___ ___ financi financin!. n!. 3. #x"ecte& #x"ecte& #4S !enerall __increases___ __increases___ as the &ebt5assets &ebt5assets ratio increases. increases. 6. A firm with __fluctuati __fluctuatin!__ n!__ earnin!s earnin!s is most most a""ro"riate a""ro"riate for usin! the the "olic of 7extra8 &i%i&en&s. 10. A stock stock s"lit in%ol%es a re&uction in the __"ar__ ___%alue__ ___%alue__ of the common stock/ but no accountin! transfers are ma&e between accounts.

1

SECTION II. M#ltiple Choice "#e!tion! (1 "oint each)

1. ron 'or&on an& 9ohn intner belie%e that the require& return on equit increases as the &i%i&en& "aout ratio is &ecrease&. Their ar!ument is base& on the assum"tion that a. In%estors are in&ifferent between &i%i&en&s an& ca"ital !ains.  b. In%estors require that the &i%i&en& iel& an& ca"ital !ains iel& equal a constant. c. a"ital !ains are taxe& at a hi!her rate than &i%i&en&s. $. In%estors %iew &i%i&en&s as bein! less risk than "otential future ca"ital !ains. e. In%estors %alue a &ollar of ex"ecte& ca"ital !ains more hi!hl than a &ollar of  ex"ecte& &i%i&en&s because of the lower tax rate on ca"ital !ains.  *. In the real worl&/ we fin& that &i%i&en&s a.  b. c. &. e.

;suall exhibit !reater stabilit than earnin!s. 2luctuate more wi&el than earnin!s. Ten& to be a lower "ercenta!e of earnin!s for mature firms. Are usuall chan!e& e%er ear to reflect earnin!s chan!es. Are usuall set as a fixe& "ercenta!e of earnin!s.

+. A decrease  in a firm a.  b. c. &. e.

not   ha%e

an influence on the o"timal &i%i&en&

The "ossibilit of acceleratin! or &elain! in%estment "ro?ects. A stron! sharehol&ers< "reference for current income %ersus ca"ital !ains. @on& in&enture constraints. The costs associate& with sellin! new common stock. All of the statements abo%e can ha%e an effect on &i%i&en& "olic.

$. A stock s"lit will cause a chan!e in the total &ollar amounts shown in which of the followin! balance sheet accounts> a.  b. c. &. e.

ash. ommon stock. 4ai&-in ca"ital. etaine& earnin!s. None of the statements abo%e is correct.

*

. 4etersen o. has a ca"ital bu&!et of B1/*00/000. The com"an wants to maintain a tar!et ca"ital structure that consists of 0 "ercent &ebt an& ,0 "ercent equit. The com"an forecasts that its net income this ear will be B00/000. If the com"an follows a resi&ual &i%i&en& "olic/ what will be its "aout ratio> a. b. c. &. e.

0C *0C ,0C 0C 30C

. =hich of the followin! affects a firm a.  b. c. $. e.

The le%el of uncertaint about future sales. The &e!ree of o"eratin! le%era!e. The &e!ree of financial le%era!e. Statements a an& b are correct. All of the statements abo%e are correct.

3. =hich of the followin! statements best &escribes the o"timal ca"ital structure> a. The o"timal ca"ital structure is the mix of &ebt/ equit/ an& "referre& stock  that maximiDes the com"an