Exam (elaborations)
Exam (elaborations) FIN 516 (FIN516)
- Course
- Institution
Exam of 10 pages for the course FIN 516 at Devry University (FIN 516 FINAL EXAM)
[Show more]
Seller
Follow
PerfectStudy
Reviews received
Content preview
FIN 516 FINAL EXAM1. (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.
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)
2. (TCO D) Which of the following is generally NOT true and an advantage of going
public?
(a) Facilitates stockholder diversification.
(b) Increases the liquidity of the firm's stock.
(c) Makes it easier to obtain new equity capital.
(d) Establishes a market value for the firm.
(e) Makes it easier for owner-managers to engage in profitable self-dealings.
Question 3.3. (TCO E) Buster’s Beverages is negotiating a lease on a new piece of
equipment that would cost $100,000 if purchased. The equipment falls into the MACRS
, 3-year class, and it would be used for 3 years and then sold, because the firm plans to
move to a new facility at that time. The estimated value of the equipment after 3 years is
$30,000. If the borrow and purchase option is used, the cash flows would be the
following: (Year 1) -2,400; (Year 2) -3,800; (Year 3) -1,400; (Year 4) -79,600; all of these
cash outflows would be at the beginning of the respective years. Alternatively, the firm
could lease the equipment for 3 years, with annual lease payments of $29,000 per year,
payable at the beginning of each year. The firm is in the 20% tax bracket. If it borrows
and purchases, it could obtain a 3-year simple interest loan, to purchase the equipment
at a before-tax interest rate of 10%. If there is a positive net advantage to leasing, the
firm will lease the equipment. Otherwise, it will buy it. What is the NAL?
(a) $5,736
(b) $6,023
(c) $6,324
(d) $6,640
(e) $6,972 (Points : 20)
Life of equipment: 3 Tax rate: 20%
Loan amount = equipment cost:$100,000 Maintenance costs: $3,000
Interest rate, simple: 10.0% Salvage value: $30,000
Lease Pmt: $29,000
Loan Analysis: 0 1 2 3 Totals
MACRS factor 0.33 0.45 0.15 0.93
Depreciation 33,000 45,000 15,000 93,000
Loan repayment -100,000
Interest -10,000 -10,000 -10,000
Int tax saving (Interest T)) 2,000 2,000 2,000
Maintenance -3,000 -3,000 -3,000
Maint. tax saving (Maint. T) 600 600 600
Depr'n tax saving (Deprn T) 6,600 9,000 3,000
Net operating CF -2,400 -3,800 -1,400 -105,000
Salvage value before taxes 30,000
Book value (Cost − Total dep'rn) 7,000
Taxable salvage value 23,000
Tax on salvage value -4,600
Salvage value after taxes 25,400
Total Net CF - 2,400 -3,800 -1,400 -79,600
PV cost at I(1 − T) = 8.00% -70,308
Lease Analysis: 0 1 2 3
Lease payment -29,000 -29,000 -29,000
Tax saving on pmt 5,800 5,800 5,800 0
Net cost of lease -23,200 -23,200 -23,200 0
PV cost of leasing at I(1 − T) -64,572
NAL = $5,736
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller PerfectStudy. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $12.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
71498 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now