Financial 3

Capital structure is irrelevant if: I) capital markets are efficient; II) each investor can borrow/lend on the same terms as the firm; III) there are no tax benefits to debt

I only

II only

III only

I, II, and III

Why does MM Proposition I not hold in the presence of corporate taxes?

A. Levered firms pay lower taxes when compared with identical unlevered firms.

B. Bondholders require higher rates of return compared with stockholders.

C. Earnings per share are no longer relevant with taxes.

D. Dividends are no longer relevant with taxes

Which of the following is an important assumption required if using the WACC formula?

Companies rebalance their capital structure to maintain a constant debt ratio.

WACC must be used on public companies with actively traded securities.

Management bonuses must be added back to free cash flows.

The firm cannot issue any further debt without adjusting its WACC.

The opportunity cost of capital, used to calculate the base‐case for adjusted present value analyses, can be thought of as:

the promised yield rather than the expected yield of an investment.

the rate corresponding to an average debt level among firms in the industry.

the WACC of an all‐equity financed version of the firm.

the return on the opportunities exploited by a firm's competitors.

If the risk‐free interest rate increases, then:

Call option prices increase.

call option prices decrease.

call option prices remain the same.

call option prices can either increase, decrease, or remain the same.

In terms of real options, the cash flows from the project play the same role as:

the stock price.

The exercise price.

dividends

The variance of the underlying asset.

Tech Com announces a major expansion into Internet services. This announcement causes the price of Tech Com stock to increase, but also causes an increase in the volatility of the stock price. Which of the following correctly identifies the impact of these changes on the price of Tech Com call options?

Both changes cause the price of the call option to decrease.

Both changes cause the price of the call option to increase.

The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase.

The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease.

A "samurai bond" is a bond:

sold by a company from Japan.

Sold in the United States by a company from Japan.

Sold in Japan by a local company

sold in Japan by a company from some other country.

If a firm uses a project‐specific cost of capital for evaluating all projects, which situation(s) will likely occur? I) The firm will accept poor low‐risk projects. II) The firm will reject good high‐risk projects. III) The firm will correctly accept projects with average risk.

I only

II only

III only

I, II, and III

If projects have implied options, then:

the shorter the forecasted life of the project the less valuable the option is.

the longer the forecasted life of the project the less valuable the option is.

the shorter the forecasted life of the project the more valuable the option is.

Project life does not change the value option.

Financial 3

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