Corporate FinanceBerk DeMarzo Test Bank Chapter

1、Corporate Finance, 3e (Berk/DeMarzo)Chapter 14 Capital Structure in a Perfect Market14.1 Equity Versus Debt FinancingUse the following information to answer the question(s) below.Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $30

2、0 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million.1) The expected return for Nielson Motors stock without leverage is closest to:A) -25.0%B) -17.5%C) -12.5%D) 12.5%Answer: DExplanation: D) ErNM = = Diff: 1Section: 14.1 Eq

3、uity Versus Debt FinancingSkill: Analytical2) Suppose the risk-free interest rate is 4%. If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend, then according to MM, the market value of its equity just after the dividend is paid would be closest t

4、o:A) $0 millionB) $150 millionC) $250 millionD) $400 millionAnswer: CExplanation: C) Value of equity = Total value - value of debt = $400 - 150 = $250Diff: 1Section: 14.1 Equity Versus Debt FinancingSkill: Analytical3) Suppose the risk-free interest rate is 4%. If Nielson borrows $150 million today

5、at this rate and uses the proceeds to pay an immediate cash dividend, then according to MM, the expected return of Nielson's stock just after the dividend is paid would be closest to:A) -17.5%B) -12.5%C) 12.5%D) 17.5%Answer: DExplanation: D) Value of equity = Total value - value of debt = $400 -

6、 150 = $250ErNM = = = 17.6%Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical4) Which of the following statements is FALSE?A) The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its capital structure.B) The most common choices are fin

7、ancing through equity alone and financing through a combination of debt and equity.C) The project's NPV represents the value to the new investors of the firm created by the project.D) When corporations raise funds from outside investors, they must choose which type of security to issue.Answer: C

8、Explanation: C) The project's NPV represents the value to the existing shareholders of the firm created by the project.Diff: 1Section: 14.1 Equity Versus Debt FinancingSkill: Conceptual5) Equity in a firm with debt is called:A) levered equity.B) riskless equity.C) unlevered equity.D) risky equit

9、y.Answer: ADiff: 1Section: 14.1 Equity Versus Debt FinancingSkill: Definition6) Equity in a firm with no debt is called:A) levered equity.B) unlevered equity.C) riskless equity.D) risky equity.Answer: BDiff: 1Section: 14.1 Equity Versus Debt FinancingSkill: Definition7) Which of the following statem

10、ents is FALSE?A) Modigliani and Miller's conclusion verified the common view, which stated that even with perfect capital markets, leverage would affect a firm's value.B) We can evaluate the relationship between risk and return more formally by computing the sensitivity of each security'

11、s return to the systematic risk of the economy.C) Investors in levered equity require a higher expected return to compensate for its increased risk.D) Leverage increases the risk of equity even when there is no risk that the firm will default.Answer: AExplanation: A) Modigliani and Miller's conc

12、lusion went against the common view that even with perfect capital markets, leverage would affect a firms value.Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Conceptual8) Which of the following statements is FALSE?A) Leverage decreases the risk of the equity of a firm.B) Because the cash f

13、lows of the debt and equity sum to the cash flows of the project, by the Law of One Price the combined values of debt and equity must be equal to the cash flows of the project.C) Franco Modigliani and Merton Miller argued that with perfect capital markets, the total value of a firm should not depend

14、 on its capital structure.D) It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.Answer: AExplanation: A) Leverage increases the risk of the equity of a firm.Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: ConceptualUse

15、the information for the question(s) below.Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%

16、. The risk-free interest rate is 5%.9) The NPV for this project is closest to:A) $6,250B) $14,100C) $10,000D) $18,600Answer: CExplanation: C) NPV = - $80,000 = $10,000Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical10) Suppose that to raise the funds for the initial investment, the

17、 project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. The market value of the unlevered equity for this project is closest to:A) $94,100B) $90,000C) $86,250D) $98,600Answer: BExplanation: B) PV(equity cash flows) = = $90,000Di

18、ff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical11) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate, then the cash flow that equity holders will receive in one year in a weak economy is closest to:A) $6,000B) $10,000C) $0D) $3

19、3,000Answer: AExplanation: A) $90,000 - $80,000(1.05) = $6,000Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical12) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate, then the cash flow that equity holders will receive in one ye

20、ar in a strong economy is closest to:A) $0B) $6,000C) $33,000D) $10,000Answer: CExplanation: C) $117,000 - $80,000(1.05) = $33,000Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical13) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free

21、 rate, then the value of the firm's levered equity from the project is closest to:A) $0B) $10,000C) $6,000D) $8,600Answer: BExplanation: B) PV(equity cash flows) = = $90,000 - $80,000 = $10,000Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical14) Suppose that to raise the funds f

22、or the initial investment the firm borrows $80,000 at the risk free rate, then the cost of capital for the firm's levered equity is closest to:A) 45%B) 25%C) 15%D) 95%Answer: DExplanation: D) PV(equity cash flows) = = $90,000 - $80,000 = $10,000 (value of levered equity)So, $10,000 = So, 1 + x =

23、 So, x = .95Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical15) Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder. In this situation, the cash flow that equity holders will receive

24、in one year in a weak economy is closest to:A) $90,000B) $0C) $50,000D) $48,000Answer: DExplanation: D) $90,000 - $40,000(1.05) = $48,000Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical16) Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the ri

25、sk free rate and issues new equity to cover the remainder. In this situation, the cash flow that equity holders will receive in one year in a strong economy is closest to:A) $117,000B) $75,000C) $50,000D) $0Answer: BExplanation: B) $117,000 - $40,000(1.05) = $75,000Diff: 2Section: 14.1 Equity Versus

26、 Debt FinancingSkill: Analytical17) Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to:A) $0B) $50,000C) $

27、90,000D) $40,000Answer: BExplanation: B) PV(equity cash flows) = = $90,000 - $40,000 = $50,000Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical18) Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover

28、 the remainder. In this situation, the cost of capital for the firm's levered equity is closest to:A) 23%B) 25%C) 15%D) 18%Answer: AExplanation: A) PV(equity cash flows) = = $90,000 - $40,000 = $50,000 (value of levered equity)So, $50,000 = So, 1 + x = So, x = .23Diff: 3Section: 14.1 Equity Vers

29、us Debt FinancingSkill: Analytical19) Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder. In this situation, calculate the value of the firm's levered equity from the project. What is the cost of

30、capital for the firm's levered equity?Answer: PV(equity cash flows) = = $90,000 - $45,000 = $45,000 (value of levered equity)90,000 - 45,000(1.05) = $42,770117,000 - 45,000(1.05) = $69,750So, $45,000 = So, 1 + x = So, x = .25Diff: 2Section: 14.1 Equity Versus Debt FinancingSkill: Analytical20) T

31、wo separate firms are considering investing in this project. Firm unlevered plans to fund the entire $80,000 investment using equity, while firm levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment. Construct a table detailing the pe

32、rcentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.Answer: Initial ValueC/F Strong EconomyC/F Weak EconomyReturns Strong EconomyReturns Weak EconomyDebt$45,000 $ 47,250 $47,250 5%5%Levered Equity$45,000 $ 69,750 $42,750 55%-5%Unlevered

33、 Equity$90,000 $117,000 $90,000 30%0%PV(equity cash flows) = = $90,000C/F (weak economy) = $90,000 (unlevered) - $45,000(1.05) (debt) = $42,750 (levered)C/F (strong economy) = $117,000 (unlevered) - $45,000(1.05) (debt) = $69,750 (levered)Returns = Diff: 3Section: 14.1 Equity Versus Debt FinancingSk

34、ill: Analytical21) Two separate firms are considering investing in this project. Firm unlevered plans to fund the entire $80,000 investment using equity, while firm levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment. Calculate the

35、expected returns for both the levered and unlevered firm.Answer: Initial ValueC/F Strong EconomyC/F Weak EconomyReturns Strong EconomyReturns Weak EconomyExpected ReturnDebt$45,000 $ 47,250 $47,250 5%5%5%Levered Equity$45,000 $ 69,750 $42,750 55%-5%25%Unlevered Equity$90,000 $117,000 $90,000 30%0%15

36、%PV(equity cash flows) = = $90,000C/F (weak economy) = $90,000 (unlevered) - $45,000(1.05) (debt) = $42,750 (levered)C/F (strong economy) = $117,000 (unlevered) - $45,000(1.05) (debt) = $69,750 (levered)Returns = Expected return = .5(strong return) + .5(weak return)Diff: 3Section: 14.1 Equity Versus

37、 Debt FinancingSkill: Analytical22) Two separate firms are considering investing in this project. Firm unlevered plans to fund the entire $80,000 investment using equity, while firm levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investmen

38、t. Calculate the risk premiums for both the levered and unlevered firm.Answer: Initial ValueC/F Strong EconomyC/F Weak EconomyReturns Strong EconomyReturns Weak EconomyExpected ReturnDebt$45,000 $ 47,250 $47,250 5%5%5%Levered Equity$45,000 $ 69,750 $42,750 55%-5%25%Unlevered Equity$90,000 $117,000 $

39、90,000 30%0%15%PV(equity cash flows) = = $90,000C/F (weak economy) = $90,000 (unlevered) - $45,000(1.05) (debt) = $42,750 (levered)C/F (strong economy) = $117,000 (unlevered) - $45,000(1.05) (debt) = $69,750 (levered)Returns = Expected return = .5(strong return) + .5(weak return)Risk premium = expec

40、ted return - risk free rateDiff: 3Section: 14.1 Equity Versus Debt FinancingSkill: Analytical14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueUse the following information to answer the question(s) below.Galt Industries has 50 million shares outstanding and a market capitalization of $1.

41、25 billion. It also has $750 million in debt outstanding. Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt. Assume perfect capital markets.1) The number of shares that Galt must issue is closest to:A) 15 millionB) 25 millionC) 30

42、millionD) 40 millionAnswer: CExplanation: C) share price = = $25 number of new shares = = 30 millionDiff: 2Section: 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueSkill: Analytical2) Suppose you are a shareholder in Galt industries holding 100 shares, and you disagree with this decisio

43、n to delever the firm. You can undo the effect of this decision byA) borrowing $1500 and buying 60 shares of stock.B) selling 32 shares of stock and lending $800.C) borrowing $1000 and buying 40 shares of stock.D) selling 40 shares of stock and lending $1000.Answer: AExplanation: A) share price = =

44、$25 value of equity = 25 × 100 = $2,500Galt's pre-delevered Debt/Equity = = .60 for every $1 equity need $0.60 debt, so you need to borrow $0.60 × $2,500 = $1,500 and then buy $1,500/$25 = 60 more shares of stock.Diff: 2Section: 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm V

45、alueSkill: Analytical3) Suppose you are a shareholder in Galt industries holding 600 shares, and you disagree with this decision to delever the firm. You can undo the effect of this decision by:A) Borrow $6,000 and buy 240 shares of stockB) Sell 240 shares of stock and lend $6,000C) Borrow $9,000 an

46、d buy 360 shares of stockD) Sell 360 shares of stock and lend $9,000Answer: CExplanation: C) share price = = $25 value of equity = 25 × 600 = $15,000Galt's pre-delevered Debt/Equity = = .60 for every $1 equity need $0.60 debt, so you need to borrow $0.60 × $15,000 = $9,000 and then buy

47、 $9,000/$25 = 360 more shares of stock.Diff: 2Section: 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueSkill: AnalyticalUse the following information to answer the question(s) below.d'Anconia Copper is an all-equity firm with 60 million shares outstanding, which are currently tradin

48、g at $20 per share. Last month, d'Anconia announced that it will change its capital structure by issuing $300 million in debt. The $200 million raised by this issue, plus another $200 million in cash that d'Anconia already has, will be used to repurchase existing shares of stock. Assume that

49、 capital markets are perfect.4) The market capitalization of d'Anconia Copper before this transaction takes place is closest to:A) $800 millionB) $900 millionC) $1,100 millionD) $1,200 millionAnswer: DExplanation: D) Market Cap = 60 million shares × $20 share = $1,200 millionDiff: 1Section:

50、 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueSkill: Analytical5) The market capitalization of d'Anconia Copper after this transaction takes place is closest to:A) $800 millionB) $900 millionC) $1,100 millionD) $1,200 millionAnswer: AExplanation: A) Market Cap = 60 million shares

51、 × $20 share - $200 Debt - $200 Cash = $800 millionDiff: 1Section: 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueSkill: Analytical6) At the conclusion of this transaction, the number of shares that d'Anconia Copper will repurchase is closest to:A) 5 millionB) 15 millionC) 20

52、millionD) 40 millionAnswer: CExplanation: C) Number of shares repurchased = = 20 millionDiff: 1Section: 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueSkill: Analytical7) At the conclusion of this transaction, the number of shares that d'Anconia Copper will have outstanding is clos

53、est to:A) 5 millionB) 15 millionC) 20 millionD) 40 millionAnswer: DExplanation: D) Number of shares repurchased = = $20 millionNumber of Shares outstanding = 60 million - 20 million repurchased = 40 million sharesDiff: 1Section: 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueSkill: Ana

54、lytical8) At the conclusion of this transaction, the value of a share of d'Anconia Copper will be closest to:A) $18.33B) $20.00C) $25.00D) $27.50Answer: BExplanation: B) Number of shares repurchased = = $20 millionNumber of Shares outstanding = 60 million - 20 million repurchased = 40 million sh

55、aresPrice per share = ($1,200 million - $300 million - $100 million)/40 million shares = $20 shareDiff: 2Section: 14.2 Modigliani-Miller I: Leverage, Arbitrage, and Firm ValueSkill: Analytical9) Suppose you are a shareholder in d'Anconia Copper holding 300 shares, and you disagree with the decis

56、ion to lever the firm. You can undo the effect of this decision byA) borrowing $2,000 and buying 100 shares of stock.B) selling 100 shares of stock and lending $2,000.C) borrowing $1,200 and buying 60 shares of stock.D) selling 60 shares of stock and lending $1,200.Answer: DExplanation: D) d'Anc

57、onia Copper's = = .20 for every $1 invested you need $0.80 in equity and $0.20 in debtPre levering your portfolio consisted of 300 shares × $20 = $6000 in stock. Of this you need to sell 20% to reinvest into bonds so you need to sell ($6,000 × .2 = $1,200/$20 per share = 60 shares of stock and then lend this money