.494px;=”” block;=””>1 Question 1Which of the following is an internal source of equity finance for the firm?(a)(b)(c)(d)(e) Rights issuePrivate placement.IPODividend Reinvestment PlanNone of the above Question 2Which of the following mechanisms is not used to determine the issue price of an IPO?(a)(b)(c)(d)(e) Fixed pricingOpen pricingReverse auctionConstrained open pricingNone of the above Question 3Assuming all rights are exercised the closer the subscription price on a rights issue is set tothe cum-rights market price of the share?(a)(b)(c)(d)(e) the greater is the market value of the rightthe smaller is the expected dilution in the value of each of the investor’s sharesthe more likely that the rights issue will be fully subscribedthe smaller is the need to have the issue underwrittenNone of the above Question 4Assume we have a perfectly competitive market with no frictions. Carsten holds shares in thelight bulb manufacturing firm Caliginous Ltd. Caliginous announces a 1 for 5 rights issuewith a subscription price of $5 per share. The theoretical value of the right is $2.5. What isCaliginous’ current market price (cum-rights)?(a)(b)(c)(d)(e) $8.00$7.50$7.00$6.50None of the above 2Question 5Assume we have a perfectly competitive market with no frictions. Bryan holds shares in thelight bulb manufacturing firm Caliginous Ltd. Caliginous announces a 1 for 4 rights issuewith a subscription price of $2 per share. The theoretical value of the right is $2.4.Caliginous’ current market price is $5. What will be the theoretical ex-rights price?(a)(b)(c)(d)(e) $4.40$3.00$2.60$0.65None of the above Question 6Which of the following statement/s is/are true with respect to the initial pricing of IPOs?(a) Ritter in his 1998 article Initial Public Offerings presents compellinginternational evidence to suggest that IPOs are initially overpriced by issuingfirms (that is the subscription price is set too high).(b) IPOs are initially overpriced so as to encourage investors to subscribe to the float hopefully setting off cascades of demand for the shares.(c) Investment bankers advising on the IPO might have an incentive to underprice theissue so as to make their own job in marketing the float easier(d) None of the above(e) More than one of (a) (b) or (c) Question 7The payoffs to shareholders in a leveraged firm replicate the payoff to a:(a)(b)(c)(d)(e) Short (sold) position in a call optionShort (sold) position in a put optionLong (bought) position in a call optionLong (bought) position in a put optionNone of the above Question 8Which of the following statement(s) increase(s) the propensity to engage in a financial lease?(a)(b)(c)(d)(e) High maintenance costs of the asset to be leasedAssets that have unique characteristics that the lessee values moreLower costs in quality assessment and transfer of ownershipAssets that the lessor obtains at a higher market priceNone of the above 3Question 9In contrast to a financial lease an operating lease…(a)(b)(c)(d)(e) Will be reported on the balance sheet of the lesseeIncludes an option to cancel the leaseIs long-term to cover the operating life of the assetTransfers the risks of ownership from the lessor to the lesseeMore than one of (a) (b) (c) or (d) Question 10The potential value of cross-border leases arises from…(a)(b)(c)(d)(e) Different corporate income tax rates in the lessor and lessee countryDifferent corporate governance practices in lessor and lessee countryDifferent leverage ratios between lessor and lesseeDifferent depreciation rates in lessor and lessee countryMore than one of (a) (b) (c) or (d) Question 11Which of the following statements are a correct description of the impact of leverage on thereturns of shareholders?(a) As the level of debt increases returns to shareholders generally become morevolatile(b) Shareholders will tend to increase their required return in response to an increasein firm leverage(c) When the firm takes on debt returns to shareholders always suffer(d) None of the above(e) More than one of (a) (b) or (c) Question 12The firm LowLev Ltd is an all equity financed firm that operates in a classical tax system. Itsmarket value of equity equals $100 million. LowLev is considering to substitute $40 millionof its equity with perpetual debt to have a leverage ratio (D/D E) of 40%. Its corporate taxrate is 30%. All else equal what would be the new market value of LowLev (after taking onthe debt)?(a)(b)(c)(d)(e) $100 million$112 million$128 million$140 millionNone of the above 4Question 13Firms that use the firm-wide WACC as a discount rate applicable for all projects being putforward by divisions operating in different industries potentially face which of the followingrisks:(a) They may inappropriately accept low-risk projects that have an expected return inexcess of the WACC(b) They may inappropriately reject high-risk projects whose expected return is higherthan the firm-wide WACC but lower than their proper risk-adjusted return(c) They may wrongly accept high-risk projects and wrongly reject low-risk projects(d) (a) and (b)(e) None of the above Question 14The pecking order theory of capital structure suggests that:(a)(b)(c)(d)(e) Internal funds should be the primary means of financingThe most risky securities should be issued first to secure financingDebt is the primary means of financingEquity is the most risky and should be issued firstMore than one of (a) (b) (c) or (d) Question 15A fundamental problem in corporate finance is the asset substitution problem. The assetsubstitution problem…(a)(b)(c)(d)(e) describes one of the agency conflicts between shareholders and bondholderspredicts that shareholders substitute a call option for a put optionpredicts that managers underinvest because of a lack of financingpredicts that more high risk projects with negative NPVs will be undertakenMore than one of (a) (b) (c) or (d) Question 16A firm is likely to have higher debt capacity when (all other things being equal):(a) It has a lower proportion of tangible assets(b) A higher proportion of the value of its assets are represented by the value of itsbrand and reputation settings(c) A higher proportion of its market value is linked to future growth opportunities asopposed to assets in place(d) It has a higher proportion of assets that are used in just a few specialised settings(e) None of the above 5Question 17An Australian investor holds 35 shares in the telecommunications company Lestrat Ltd whose current stock price is $50. Lestrat will pay a fully franked dividend of $2 per share atthe end of this month. The corporate tax rate is 30% and the investor’s personal income tax is15%. What are the investor’s total after-tax proceeds?(a)(b)(c)(d)(e) $49.00$59.50$70.00$85.00None of the above Question 18Which of the following is not considered a type of share buy-back?(a)(b)(c)(d)(e) On-market buy-backSelective buy-backManagement buy-outOff-market buy-backMore than one of (a) (b) (c) or (d) Question 19Empirical evidence suggests that which of the following types of firms are more likely to payordinary dividends instead of buying back shares?(a)(b)(c)(d)(e) Firms with higher temporary non-operating cash flowsFirms with higher permanent operating cash flowsFirms with more volatile cash flowsFirms with greater information asymmetriesNone of the above Question 20Managers can have different motivations why they prefer a share buy-back over a dividendpay-out. Which of the following is not such a motivation?(a)(b)(c)(d)(e) Signal to the market that the firm is undervaluedSignal to the market that the firm has low agency costsMaintain financial flexibility by making a non-permanent distributionIncrease the share price to increase the value of executive stock optionsNone of the above 6Question 21You are an analyst employed to advise a firm’s management as to the optimal investmentdecision. You have been provided with the following information relating to four mutuallyexclusive risk-free projects: NPV0LifeRisk-free rate Project A$700 0006 years0% p.a. Project B$100 0001 year0% p.a. Project C$250 0002 years0% p.a. Project D$300 0003 years0% p.a. Which of the four projects should be undertaken?(a)(b)(c)(d)(e) Project AProject BProject CProject DUnable to answer; need more information Question 22Which of the following is the right procedure for an asset retirement decision i.e. when tofinish the project and liquidate the project-specific assets?(a) For each possible retirement year calculate the NPV of the project and choose theretirement year that gives the highest NPV(b) For each possible retirement year calculate the NPV of the project assume theretirements can be extended until infinity and choose the retirement year thatgives the highest NPV based on the perpetuity method(c) Identify the Lowest Common Multiple for all retirement years calculate the NPVfor each retirement year if the project was to be extended to the common multipleyear and choose the retirement year with the highest NPV(d) For each retirement year calculate the respective NPV considering the differentcost of the replacement machine in that year(e) More than one of (a) (b) (c) or (d)
