Question 1

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 in one year in a strong economy is closest to:

Accepted Answer

B)$117,000 - $40,000(1.05)= $75,000

Question 2

Suppose that to raise the funds for the initial investment,the 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:

Accepted Answer

B)PV(equity cash flows)= 11ea7cce_3cf0_74a2_928c_07e81e7dcba4_TB1626_11 = $90,000

Question 3

Equity in a firm with no debt is called:

Accepted Answer

Equity in a firm with no debt is called unlevered equity.

Question 4

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.Construct a table detailing the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.

Accepted Answer

The answer of Two separate firms are considering investing in...

Question 5

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:

Accepted Answer

A)$90,000 - $80,000(1.05)= $6000

Question 6

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 in one year in a weak economy is closest to:

Accepted Answer

D)$90,000 - $40,000(1.05)= $48,000

Question 7

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 strong economy is closest to:

Accepted Answer

C)$117,000 - $80,000(1.05)= $33,000

Question 8

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 capital for the firm's levered equity?

Accepted Answer

The answer of Suppose that to raise the funds for...

Question 9

Which of the following statements is FALSE?

Accepted Answer

A)Modigliani and Miller's conclusion went against the common view that even with perfect capital markets,leverage would affect a firm's value.

Question 10

Which of the following statements is FALSE?

Accepted Answer

C)The project's NPV represents the value to the existing shareholders of the firm created by the project.

Question 11

Suppose that to raise the funds for 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:

Accepted Answer

D)PV(equity cash flows)= 11ea7cce_3cf0_c2c4_928c_bfe91f099a37_TB1626_11 = $90,000 - $80,000 = $10,000 (value of levered equity)
So,$10,000 = 11ea7cce_3cf0_c2c5_928c_0135b8a0fbb8_TB1626_11 So,1 + x = 11ea7cce_3cf0_e9d6_928c_cbfb4eb0e73e_TB1626_11 So,x = .95

Question 12

Use 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 $300 million if the economy is weak.Both events are equally likely.The market value today of Nielson's assets is $400 million.
-The expected return for Nielson Motors stock without leverage is closest to:

Accepted Answer

D)E[r_NM] = 11ea7cce_3cef_8a3d_928c_f74a8fc3ba99_TB1626_11 = 11ea7cce_3cef_8a3e_928c_3fc285d58fc7_TB1626_11

Question 13

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 to:

Accepted Answer

C)Value of equity = Total value - value of debt = $400 - 150 = $250

Question 14

Which of the following statements is FALSE?

Accepted Answer

A)Leverage increases the risk of the equity of a firm.

Question 15

Use 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%.The risk-free interest rate is 5%.
-The NPV for this project is closest to:

Accepted Answer

C)NPV = 11ea7cce_3cf0_4d91_928c_5b4c822a5c54_TB1626_11 - $80,000 = $10,000

Question 16

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:

Accepted Answer

B)PV(equity cash flows)= 11ea7cce_3cf1_10e7_928c_211baa4a5488_TB1626_11 = $90,000 - $40,000 = $50,000

Question 17

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 expected return of Nielson's stock just after the dividend is paid would be closest to:

Accepted Answer

D)Value of equity = Total value - value of debt = $400 - 150 = $250 E[r_NM] = 11ea7cce_3cef_d85f_928c_a167c549849b_TB1626_11 = 11ea7cce_3cef_d860_928c_0bcd583b2edb_TB1626_11 = 17.6%

Question 18

Equity in a firm with debt is called:

Accepted Answer

Levered equity refers to equity in a firm that also has debt, which adds risk and leverage to the equity. This is opposed to unlevered equity, which refers to equity in a firm that has no debt. Riskless equity does not exist as all equity carries some level of risk. Risky equity is a vague term that does not specifically refer to equity in a levered firm.

Question 19

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the value of the firm's levered equity from the project is closest to:

Accepted Answer

B)PV(equity cash flows)= 11ea7cce_3cf0_9bb3_928c_fde10fcf3ee4_TB1626_11 = $90,000 - $80,000 = $10,000

Question 20

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 cost of capital for the firm's levered equity is closest to:

Accepted Answer

A)PV(equity cash flows)= 11ea7cce_3cf1_37f8_928c_21271dd94ffa_TB1626_11 = $90,000 - $40,000 = $50,000 (value of levered equity)
So,$50,000 = 11ea7cce_3cf1_5f09_928c_6b18d7cc5b58_TB1626_11 So,1 + x = 11ea7cce_3cf1_5f0a_928c_2950e788e3cc_TB1626_11 So,x = .23

Quiz 14: Capital Structure in a Perfect Market

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 in one year in a strong economy is closest to:

Suppose that to raise the funds for the initial investment,the 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:

Equity in a firm with no debt is called:

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:

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 in one year in a weak economy is closest to:

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 strong economy is closest to:

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 capital for the firm's levered equity?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Suppose that to raise the funds for 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:

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 to:

Which of the following statements is FALSE?

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:

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 expected return of Nielson's stock just after the dividend is paid would be closest to:

Equity in a firm with debt is called:

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the value of the firm's levered equity from the project is closest to:

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 cost of capital for the firm's levered equity is closest to: