Question 1 Using higher discount rates, Answer accelerated cost recovery depreciation is more valuable than straight line. straight-line depreciation is more valuable than the accelerated cost recovery system of depreciation. depreciation policy makes no difference. later year depreciation has a higher net present value. 3 points Question 2 The purpose of secondary trading is to Answer provide liquidity and competition between investments. provide a market for securities not handled in primary trading. provide jobs for brokers and dealers. provide lower commissions than on the organized exchanges. 3 points Question 5 Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk. Answer True False 3 points Question 6 Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency. Answer True False 3 points Question 8 A spin-off is a type of divestiture in which the assets of a division are sold to another firm. Answer True False 3 points Question 9 The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority. Answer True False 3 points Question 10 In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants. Answer True False 3 points Question 11 Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge “golden parachutes” that open if the firm is acquired are 3 procedures used to defend against hostile takeovers. These strategies are known as “poison pills.” Answer True False 3 points Question 12 Which of the following is NOT a real option?Answer The option to expand production if the product is successful. The option to buy shares of stock if its price goes up. The option to expand into a new geographic region. The option to abandon a project. The option to switch the type of fuel used in an industrial furnace. 3 points Question 15 A publicly traded company has its shares trading at $12. An unsolicited buyer publicly announces an offer to purchase the company for a price equal to $18 per share. The difference between the $12 per share and $18 per share amounts to $500 million. This is an example of Answer valuing the asset under the liquidation approach. valuing the asset using the income approach. valuing the asset using a replacement approach. an explicit cost of $500 million cost to shareholders directly relating to the Principal-Agent problem. 3 points Question 16 A company’s free cash flow per was just $3.00 million. If the expected long-run growth rate for this company is 5 percent, and if the WACC is 11 percent then what is the value of the entire firm’s operations, in millions? Answer $50.00 $50.50 $52.50 $53.00 3 points Question 17 Which of the following statements is most CORRECT? Answer Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what’s probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm. All of the answers above are correct. 3 points Question 18 Which of the following statements is most CORRECT? Answer A conglomerate merger is one where a firm combines with another firm in the same industry. Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. Defensive mergers are designed to make a company less vulnerable to a takeover. Answers a and b are correct. All of the answers above are correct. 3 points Question 19 Which of the following statements is most CORRECT? Answer Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time. Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed solely by state laws. All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management. Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter 7 of the Act. "Restructuring" a firm's debt can involve forgiving a certain portion of the debt, but it cannot call for changing the debt's maturity or its contractual interest rate. 3 points Question 26 Survival bias Answer Allows the reporting of higher than the true returns Distorts actual returns for investors Contributes at least 1% to averages. Means indexed mutual funds are undervalued versus managed funds. All of the above. 3 points Question 27 An existing corporation has 12 unrelated subsidiaries and is known as a conglomerate. It has publicly traded common stock. Applying the Principal-Agent issue, portfolio diversification concepts and the theories of public market efficiencies, which valuation method would create the highest amount for common shareholders?Answer valuing the company under the liquidation approach. valuing the company using the income approach. valuing the asset using a replacement approach. valuing the asset under the market approach. trick question; since it is publicly traded, there is no higher value. 3 points Question 32 Which of the following statements is most CORRECT? Answer One advantage of forward contracts is that they are default free. Futures contracts generally trade on an organized exchange and are marked to market daily. Goods are never delivered under forward contracts, but are almost always delivered under futures contracts. Answers a and c are correct. None of the answers above is correct.