FIN 620 Final Examination Question and Answers

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FIN 620 Final Examination Question and Answers

1. Problem 19-4 Stock Splits and Stock Dividends

Roll Corporation (RC) currently has 330,000 shares of stock outstanding that sell for $64 per
share. Assuming no market imperfections or tax effects exist, what will the share price be after:

a.

RC has a five-for-three stock split? (Do not round intermediate calculations and round
your final answer to 2 decimal places. (e.g., 32.16))

New share price $

b.

RC has a 15 percent stock dividend? (Do not round intermediate calculations and round
your final answer to 2 decimal places. (e.g., 32.16))

New share price $

c.

RC has a 42.5 percent stock dividend? (Do not round intermediate calculations and round
your final answer to 2 decimal places. (e.g., 32.16))

New share price $

d.

RC has a four-for-seven reverse stock split? (Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

New share price $

Determine the new number of shares outstanding in parts (a) through (d). (Do not round
e. intermediate calculations and round your answers to the nearest whole number. (e.g.,
32))

a. New shares
outstanding
b. New shares
outstanding
c. New shares
outstanding
d. New shares
outstanding

2. Problem 19-16 Dividend Smoothing

The Sharpe Co. just paid a dividend of $1.80 per share of stock. Its target payout ratio is 40
percent. The company expects to have an earnings per share of $4.95 one year from now.

If the adjustment rate is .3 as defined in the Lintner model, what is the dividend one year
a. from now? (Do not round intermediate calculations and round your final answer to 2
decimal places. (e.g., 32.16))

Dividend $

b.

If the adjustment rate is .6 instead, what is the dividend one year from now? (Do not round
intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Dividend $

c. Which adjustment rate is more conservative?

.6
.3
3. Problem 29-16 Mergers and Shareholder Value
Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the
economy and each companys value in that state are shown here:

State
Probability Bentley Rolls
Boom
.70
$ 290,000 $ 260,000
Recession .30
$ 110,000 $ 80,000

Bentley currently has a bond issue outstanding with a face value of $125,000. Rolls is an allequity company.

a.

What is the value of each company before the merger? (Do not round intermediate
calculations.)

Value of Bentley
Value of Rolls

$
$

What are the values of each companys debt and equity before the merger? (Leave no cells
b. blank be certain to enter 0 wherever required. Do not round intermediate
calculations.)

Equity of Rolls
Debt of Rolls
Equity of Bentley
Debt of Bentley

$
$
$

If the companies continue to operate separately, what are the total value of the companies,
c. the total value of the equity, and the total value of the debt? (Do not round intermediate
calculations.)

Value of companies
Value of equity
Value of debt

d.1

What would be the value of the merged company? (Do not round intermediate
calculations.)

Merged company
value

d.2

$
$
$

What would be the value of the merged companys debt and equity? (Do not round
intermediate calculations.)

Value of debt
Value of equity

Value of the company

$
$

e-1.

How much would shareholders gain or lose in the merger? (Do not round intermediate
calculations. Enter a gain as a positive number and a loss as a negative number.)

Shareholders gain or
$
loss

e-2.

How much would bondholders gain or lose in the merger? (Do not round intermediate
calculations. Enter a gain as a positive number and a loss as a negative number.)

Bondholders gain or
loss

4. Problem 29-8 EPS, PE, and Mergers

The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz
Corporation. Information about each firm is given here:

Flannery

Stultz

Priceearnings
6.35
12.70
ratio
Shares outstanding 73,000
146,000
Earnings
$ 230,000 $ 690,000

Flannerys shareholders will receive one share of Stultz stock for every three shares they hold in
Flannery.

What will the EPS of Stultz be after the merger? (Do not round intermediate calculations
and round your final answer to 3 decimal places. (e.g., 32.16))

a-1

EPS

What will the PE ratio be if the NPV of the acquisition is zero? (Do not round
a-2 intermediate calculations and round your final answer to 2 decimal places. (e.g.,
32.16))

PE

b.

What must Stultz feel is the value of the synergy between these two firms? (Do not round
intermediate calculations.)

Synergy value

5. Problem 19-20 Dividends versus Reinvestment

After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash.
Carlsons managers must choose between investing the cash in Treasury bonds that yield 8
percent or paying the cash out to investors who would invest in the bonds themselves.

If the corporate tax rate is 35 percent, what personal tax rate would make the investors
a. equally willing to receive the dividend or to let Carlson invest the money? (Do not round
intermediate calculations.)

Personal tax rate

b. Is the answer to (a) reasonable?

Yes
No

Suppose the only investment choice is a preferred stock that yields 12 percent. The corporate
dividend exclusion of 70 percent applies. What personal tax rate will make the stockholders
c.
indifferent to the outcome of Carlsons dividend decision? (Do not round intermediate
calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Personal tax rate

d. Is this a compelling argument for a low dividend payout ratio?

Yes
No

Edies Health and Beauty Supply has 125,000 shares of stock outstanding with a par value of $1
per share and a market value of $5 a share. The company has retained earnings of $76,500 and
capital in excess of par of $340,000. The company just announced a 1-for-5 reverse stock split.
What will the par value per share be after the split?
$0.20
$1.00
$2.50
$5.00
$10.00
On March 1, you contract to take delivery of 1 ounce of gold for $495. The agreement is good
for any day up to April 1. Throughout March, the price of gold hit a low of $425 and hit a high of
$535. The price settled on March 31 at $505, and on April 1st you settle your futures agreement at
that price. Your net cash flow is:
$-30.
$-20.
$-15.

$10.
$20.
You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased another 100
shares and then on July 22st you purchased your final 200 shares of ABC stock. The company
declared a dividend of $1.10 a share on July 5th to holders of record on Friday, July 23rd. The
dividend is payable on July 31st. How much dividend income will you receive on July 31st from
ABC?
$0
$220
$330
$440
$550
The common stock of Winsson, Inc. is currently priced at $52.50 a share. One year from now, the
stock price is expected to be either $54 or $60 a share. The risk-free rate of return is 4%. What is
the value of one call option on Winsson stock with an exercise price of $55?
$0.39
$0.41
$0.45
$0.48
$0.51
A manager should attempt to maximize the value of the firm by:
changing the capital structure if and only if the value of the firm increases.
changing the capital structure if and only if the value of the firm increases to the benefit
of inside management.
changing the capital structure if and only if the value of the firm increases only to the
benefits of the debtholders.
changing the capital structure if and only if the value of the firm increases although it
decreases the stockholders value.
changing the capital structure if and only if the value of the firm increases and
stockholder wealth is constant.
Nelson Company had equity accounts in 2008 as follows:
Projected income is $150,000 and 40% of this amount will be paid out immediately as
dividends. What will the ending retained earnings account be?

$122,000
$90,000
$242,000
$210,000
$92,000
The Tip-Top Paving Co. has an equity cost of capital of 16.97%. The debt to value ratio is .6, the
tax rate is 34%, and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?
0.08%
3.06%
14.0%
16.97%
None of these.
Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and
the market rate of return is 10.5%?

C
A
B
E
D
An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?
Insiders can sell their shares or cash out
Generate cash to pay down bank indebtedness
To establish a market value for the equity and provide funds for operations
All of the above.
None of the above.
Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for
10 payments of $1,000 per year with the first payment occurring immediately. The computer
would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9
years. The actual salvage value is negligible because of technological obsolescence. The firm can
borrow at a rate of 8%. The corporate tax rate is 30%.
What is the NPV of the lease relative to the purchase?
-$1,039.78
$339.78

$360.22
$6,610.22
None of these
A financial institution has equity equal to one-tenth of its assets. If its asset duration is currently
equal to its liability duration, then to immunize, the firm needs to:
decrease the duration of its assets.
increase the duration of its assets.
decrease the duration of its liabilities.
do nothing, i.e., keep the duration of its liabilities equal to the duration of its assets.
Given the following information, leverage will add how much value to the unlevered firm per
dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 50%
$-0.050
$-0.188
$0.367
$0.588
None of these
The market portfolio of common stocks earned 14.7% in one year. Treasury bills earned 5.7%.
What was the real risk premium on equities?

12.2%
18.7%
9.0%
6.5%
5.0%
You own one call option with an exercise price of $30 on Nadia Interiors stock. This stock is
currently selling for $27.80 a share but is expected to increase to either $28 or $34 a share over
the next year. The risk-free rate of return is 5% and the inflation rate is 3%. What is the current
value of your option if it expires in one year?
$0.76
$0.79
$0.89
$0.92

$0.95
The six components that make up the total costs of new issues are:
the spread; other direct expenses such as filing fees; indirect expenses such as
management time; economies of scale; abnormal returns and the Green Shoe option.
the discount; other direct expenses such as filing fees; indirect expenses such as
management time; due diligence costs; abnormal returns and the Green Shoe option.
the spread; other direct expenses such as filing fees; indirect expenses such as
management time; abnormal returns; underpricing and the Green Shoe option.
the spread; other direct expenses such as filing fees; economies of scale; due diligence
costs; abnormal returns and underpricing.
None of the above.
The Telescoping Tube Company is planning to raise $2,500,000 in perpetual debt at 11% to
finance part of their expansion. They have just received an offer from the Albanic County Board
of Commissioners to raise the financing for them at 8% if they build in Albanic County. What is
the total added value of debt financing to Telescoping Tube if their tax rate is 34% and Albanic
raises it for them?
$850,000
$1,200,000
$1,300,000
$1,650,000
There is no value to the scheme; Albanic is just conning Telescoping Tube into moving.
Alto and Solo are all-equity firms. Alto has 2,400 shares outstanding at a market price of $24 a
share. Solo has 4,000 shares outstanding at a price of $17 a share. Solo is acquiring Alto for
$63,000 in cash. The incremental value of the acquisition is $5,500. What is the net present value
of acquiring Alto to Solo?
$100
$400
$1,200
$2,400
$5,500
Top of Form
On June 9th, you purchased 3,000 shares of SP stock. On July 5th, you sold 400 shares of this
stock for $21 a share. You sold an additional 400 shares on July 18th at a price of $22.50 a share.
The company declared a $.30 per share dividend on June 20th to holders of record as of July 10th.
This dividend is payable on July 31st. How much dividend income will you receive on July 31st
as a result of your ownership of SP stock?

$120
$780
$810
$1,000
It is impossible to calculate with the information given

Bottom of Form
Firm A is planning on merging with Firm B. Firm A will pay Firm Bs stockholders the current
value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock outstanding at
a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of $15 a share.
What is the value per share of the merged firm?
$19.00
$19.18
$19.44
$20.00
$20.33
If rates in the market fall between now and one month from now, the mortgage banker:
loses as the mortgages are sold at a discount.
gains as the mortgages are sold at a discount.
loses as the mortgages are sold at a premium.
gains as the mortgages are sold at a premium.
neither gains nor loses.