Question

Multiple choice questions: (only one answer correct)

1. The company has the greatest chance to raise bigger amount of equity and place all the shares from the new issue if they choose:

1. Private placement
2. Best effort cash offer
3. Firm commitment cash offer

2. A sinking fund is typically used:

1. To rescue a company from bankruptcy
2. To finance mergers and acquisitions
3. To retire debt securities issued by the company

3. An analyst using Adjusted Present Value should discount proper cash flows with:

1. Return on assets
2. Return on equity
3. WACC

4. Based on Modigliani and Miller propositions we can say that if no taxes apply, the value of an unlevered firm is:

1. Greater than the levered firm
2. Smaller than the levered firm
3. The same as levered firm

5. Taxes paid by the company and its investors under the trade-off theory represents a component of:

1. Marketable claims on the company’s cash flows
2. Non-marketable claims on the company’s cash flows
3. Residual claims on the company’s cash flows

6. The theory of capital structure saying that the current capital structure reflects past decisions and has little in common with “optimal target structure” is called:

1. Signalling theory
2. Trade-off theory
3. Market timing theory

7. Pecking order theory indicates that the company’s managers would prefer:

1. Give no signal to the market and use retained earnings to finance their needs
2. Give a positive signal to the market by issuing debt
3. Give a positive signal to the market by issuing equity

8. When return on assets R_A = 10% and the cost of debt R_D = 5%, then increasing leverage would result in:

1. An increase in the company’s EPS and ROE
2. A decrease in the company’s EPS and ROE
3. No impact on company’s EPS and ROE

9. The company issued the following debt: senior unsecured debt, secured bonds (backed by a mortgage on a firm’s property) and shareholder loans. In case of default the group of investors that will be served as first from the proceeds from selling the property is:

1. Holders of senior unsecured debt
2. Holders of secured debt
3. Shareholders who provided loan to the company

10. Excessive risk taking, underinvestment and “milking” are examples of :

1. Agency costs related to the conflict between the company and debtholders
2. Agency costs related to the conflict between owners and managers
3. Agency costs related to the conflict between minority and majority shareholders

11. While valuing a levered investment project the approach that would lead to the highest value would be:

1. APV
2. Flow to Equity
3. Regardless of the approach selected, the value of a levered project should be the same

12. The following table reflects results of a Dutch auction:

Bidder	Quantity	Price
A	100	20
B	150	18
C	150	16
D	200	14
E	250	12
F	250	10

When the company decides to issue 300 the amount that they could raise would be:

1. 4.800
2. 5.100
3. 5.500

Answer 1

1) C) Firm commitment cash offer

Explanation: In case of firm commitment cash offer all the shares is purchased by the underwriter firm which the company wants to issue and at the price at which the firm wants. So, by this method they can raise high equity and all the shares will be placed. But in case of private placement and best offer , there is no guarantee that all the shares will be placed.

2) C) To retire debt securities issued by the company

Explanation: sinking fund is used to pay off some amount of debt every year by the firm.

3) B) Return on equity

Explanation: Cash flow is discounted by ROE rather than WACC.

4) C) The same as levered firm

Explanation: As per MM approach 1 without taxes , the value of levered firm is same as unlevered firm