Fi516 Advanced Finance Essay

1353 Words Feb 9th, 2012 6 Pages
Study Guide for Final Exam

1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT? (a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
(d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.
(e) The total value of the firm is independent of the amount of debt it uses. (Points: 20)

2. (TCO D) Which of the following statements is most CORRECT? (a) In a private placement, securities are sold
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(a) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
(b) The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
(c) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.
(d) The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
(e) The APV approach stands for the accounting pre-valuation approach. (Points: 20)

3. (TCO A) Which of the following statements is CORRECT? (a) Put options give investors the right to buy a stock at a certain strike price before a specified date.
(b) Call options give investors the right to sell a stock at a certain strike price before a specified date.
(c) Options typically sell for less than their exercise value.
(d) LEAPS are very short-term options that were created relatively recently and now trade in the market.
(e) An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend. (Points: 20)

4. (TCO F) A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT? (a) A swap involves the exchange of cash

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