FINC 2012 Intermediate Corporate Finance Final Exam Sample Questions Part I Multiple Choice Questions There is only one correct answer to each question. 1. What is its cost of equity if there are no taxes or other imperfections The firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. A) 18% B) 14.4% C) 10%. D) 13.5% 2. Which of the following is NOT an example of financial distress game A) Cash in and Run B) Playing for Time C) Bait and Switch D) Empire Building 3. Which of the following will tend to INCREASE the benefit of the interest tax shield given a progressive tax rate structure I An increase in tax rates II A large tax loss carry forward III A large depreciation tax deduction IV A sizeable increase in taxable income A I and III only B I and IV only C II and III only D I, II, III and IV. 4. The corporate tax rate is 35%. The personal capital gain tax rate is 15%. The personal interest gain tax rate is 33%. The dividend payment tax rate is 15%. Given all the information above, which one of the following statements is CORRECT A) The relative advantage formula yields the value of 1.21. B) Since the dividend payment and capital gain tax rate are identical, individual investors will be indifferent between dividend payment and stock repurchase. C) The re
lative advantage formula yields the value of 1.14. D) MM theory with corporate tax argues that, given the tax environment descried in the question, debt is preferred to equity. 5. Which of the following statement is TRUE about the financial planning A) Financial planning should attempt to minimize risk. B) Financial planning is necessary because financing and investment decisions interact and should not be made independently. C) Firms’ planning horizons rarely exceed three years. D) Financial planning models should include as much detail as possible. Part II Short Answer Questions 1.a The stock price falls following the announcement of the new debt issuance. Could you use the trade-off theory to explain why this could happen 1.b What is Economic Value Added (EVA) in assessing the management’s performance Point out one limitation of this measurement. 2 Sweet Melon Inc has debt with both a face and a market value of $ 3,000. This debt has a coupon rate of 7% and pays interest annually. The expected earnings before interest and tax is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. Answer the questions below. Write down the equations and the correct intermediate steps will be given credits. a) What is the value of the unlevered firm b) What is the value of the levered firm c) What is the D/E ratio of the levered firm