FIN 516 Week 8 Final Exam
Page 1
Question 1.1. (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)
Question 2.2. (TCO D) Which of the following statements is most CORRECT?
(a) In a private placement, securities are sold to private (individual) investors rather than to
institutions.
(b)Private placements occur most frequently with stocks, but bonds can also be sold
in a private placement.
(c) Private placements are convenient for issuers, but the convenience is offset by higher
flotation costs.
(d)The SEC requires that all private placements be handled by a registered investment
banker.
(e) Private placements can generally bring in funds faster than is the case with public
offerings. (Points : 20)
Question 3.3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a
truck with a 4- year life that costs $40,000 and falls into the MACRS 3-year class. If the firm
borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized
over the truck's 4-year life. The loan payments would be made at the end of each year. The
truck will be used for 4 years, at the end of which time it will be sold at an estimated
residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the
following: (Year 1) - 6,339; (Year 2) -4,764; (Year 3)-9,943; (Year 4) -5,640; all occurring at
the end of respective years. The lease terms, call for a $10,000 lease payment (4 payments
total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy?
(a) $849
(b) $896
(c) $945
(d) $997
(e) $1,047 (Points : 20)
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, FIN 516 Week 8 Final Exam
Question 4.4. (TCO I) Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-
month Canadian securities have an annualized return of 6% (and thus a 6-month periodic
return of 3%). 6- month U.S. securities have an annualized return of 6.5% and a periodic
return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar
exchange rate in the 180-day forward market?
(a) 1 U.S. dollar = 0.6235 Canadian dollars
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Page 1
Question 1.1. (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)
Question 2.2. (TCO D) Which of the following statements is most CORRECT?
(a) In a private placement, securities are sold to private (individual) investors rather than to
institutions.
(b)Private placements occur most frequently with stocks, but bonds can also be sold
in a private placement.
(c) Private placements are convenient for issuers, but the convenience is offset by higher
flotation costs.
(d)The SEC requires that all private placements be handled by a registered investment
banker.
(e) Private placements can generally bring in funds faster than is the case with public
offerings. (Points : 20)
Question 3.3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a
truck with a 4- year life that costs $40,000 and falls into the MACRS 3-year class. If the firm
borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized
over the truck's 4-year life. The loan payments would be made at the end of each year. The
truck will be used for 4 years, at the end of which time it will be sold at an estimated
residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the
following: (Year 1) - 6,339; (Year 2) -4,764; (Year 3)-9,943; (Year 4) -5,640; all occurring at
the end of respective years. The lease terms, call for a $10,000 lease payment (4 payments
total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy?
(a) $849
(b) $896
(c) $945
(d) $997
(e) $1,047 (Points : 20)
This study source was downloaded by 100000832558064 from CourseHero.com on 01-19-2022 13:20:57 GMT -06:00
https://www.coursehero.com/file/9646145/Final-Exam/
, FIN 516 Week 8 Final Exam
Question 4.4. (TCO I) Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-
month Canadian securities have an annualized return of 6% (and thus a 6-month periodic
return of 3%). 6- month U.S. securities have an annualized return of 6.5% and a periodic
return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar
exchange rate in the 180-day forward market?
(a) 1 U.S. dollar = 0.6235 Canadian dollars
This study source was downloaded by 100000832558064 from CourseHero.com on 01-19-2022 13:20:57 GMT -06:00
https://www.coursehero.com/file/9646145/Final-Exam/
