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Question 1 Which of the following statements about valuing a firm using the APV

Question
1
Which
of the following statements about valuing a firm using the APV approach is most
CORRECT?
Answer

The
horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the levered cost of equity.
The
horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the cost of debt.
The
horizon value is calculated by discounting the expected earnings at the WACC.
The
horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the WACC.
The
horizon value must always be more than 20 years in the future.
8
points
Question
2
Operating
leases often have terms that include
Answer

maintenance
of the equipment by the lessor.
full
amortization over the life of the lease.
very
high penalties if the lease is cancelled.
restrictions
on how much the leased property can be used.
much
longer lease periods than for most financial leases.
8
points
Question
3
From
the lessee viewpoint, the riskiness of the cash flows, with the possible
exception of the residual value, is about the same as the riskiness of the
lessee’s
Answer

equity
cash flows.
capital
budgeting project cash flows.
debt
cash flows.
pension
fund cash flows.
sales.
8 points
Question
4
Which
of the following is generally NOT true and an advantage of going
public?
Answer

Facilitates
stockholder diversification.
Increases
the liquidity of the firm’s stock.
Makes
it easier to obtain new equity capital.
Establishes
a market value for the firm.
Makes
it easier for owner-managers to engage in profitable self-dealings.
8
points
Question
5
Which
of the following statements is NOT
CORRECT?
Answer

When
a corporations shares are owned by a few individuals who own most of the stock
or are part of the firms management, we say that the firm is closely, or
privately, held.
Going
public establishes a firms true intrinsic value and ensures that a liquid
market will always exist for the firms shares.
Publicly
owned companies have sold shares to investors who are not associated with
management, and they must register with and report to a regulatory agency such
as the SEC.
When
stock in a closely held corporation is offered to the public for the first
time, the transaction is called going public, and the market for such stock
is called the new issue market.
It
is possible for a firm to go public and yet not raise any additional new
capital.
8
points
Question
6
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 whats
probably a lower cost, diversification benefits is generally not a valid motive
for a publicly held firm.
Operating
economies are never a motive for mergers.

8 points
Question
7
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.
Hostle
mergers always create value for the acquiring firm.
In
a tender offer, the target firms management always remain after the merger is
completed.
8
points
Question
8
Which
of the following statements is most CORRECT?
Answer

If
new debt is used to refund old debt, the correct discount rate to use in the
refunding analysis is the before-tax cost of new debt.
The
key benefits associated with refunding debt are the reduction in the firm’s
debt ratio and the creation of more reserve borrowing capacity.
The
mechanics of finding the NPV of a refunding decision are fairly
straightforward. However, the decision of when to refund is not always
clear because it requires a forecast of future interest rates.
If
a firm with a positive NPV refunding project delays refunding and interest
rates rise, the firm can still obtain the entire NPV by locking in a low coupon
rate when the rates are low, even though it actually refunds the debt after
rates have risen.
Suppose
a firm is considering refunding and interest rates rise during time when the
analysis is being done. The rise in rates would tend to lower the
expected price of the new bonds, which would make them cheaper to the firm and
thus increase the expected interest savings.
8
points
Question
9
Which
of the following statements is most CORRECT?
Answer

In
a private placement, securities are sold to private (individual) investors
rather than to institutions.
Private
placements occur most frequently with stocks, but bonds can also be sold in a
private placement.
Private
placements are convenient for issuers, but the convenience is offset by higher
flotation costs.
The
SEC requires that all private placements be handled by a registered investment
banker.
Private
placements can generally bring in funds faster than is the case with public
offerings.
8
points
Question
10
Chapter
7 of the Bankruptcy Act is designed to do which of the following?
Answer

Protect
shareholders against creditors.
Establish
the rules of reorganization for firms with projected cash flows that eventually
will be sufficient to meet debt payments.
Ensure
that the firm is viable after emerging from bankruptcy.
Allow
the firm to negotiate with each creditor individually.
Provide
safeguards against the withdrawal of assets by the owners of the bankrupt firm
and allow insolvent debtors to discharge all of their obligations and to start
over unhampered by a burden of prior debt.
8
points
Question
11
Which
of the following statements is most CORRECT?
Answer

Leveraged
buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a
firm public.
In
a typical LBO, bondholders do well but shareholders see their value decline.
Firms
are forbidden by law to sell any assets during the first five years following a
leverage buyout.
LBOs
are never backed by private equity firms.
LBOs
typically use a lot of debt.
8
points
Question
12
Financial
Accounting Standards Board (FASB) Statement #13 requires that for an
unqualified audit report, financial (or capital) leases must be included in the
balance sheet by reporting the
Answer

residual
value as a fixed asset.
residual
value as a liability.
present
value of future lease payments as an asset and also showing this same amount as
an offsetting liability.
undiscounted
sum of future lease payments as an asset and as an offsetting liability.
undiscounted
sum of future lease payments, less the residual value, as an asset and as an
offsetting liability.
8
points
Question
13
Which
of the following statements concerning warrants is correct?
Answer

Bonds
with warrants and convertible bonds both have option features that their
holders can exercise if the underlying stocks price increases. However, if the
option is exercised, the issuing companys debt declines if warrants were used
but remains the same if it used convertibles.
Warrants
are long-term put options that have value because holders can sell the firms
common stock at the exercise price regardless of how low the market price
drops.
Warrants
are long-term call options that have value because holders can buy the firms
common stock at the exercise price regardless of how high the stocks price has
risen.
A
firms investors would generally prefer to see it issue bonds with warrants
than straight bonds because the warrants dilute the value of new shareholders,
and that value is transferred to existing shareholders.
A
drawback to using warrants is that if the firm is very successful, investors
will be less likely to exercise the warrants, and this will deprive the firm of
receiving any new capital.
8
points
Question
14
Which
of the following statements is most CORRECT?
Answer

Preferred
stock generally has a higher component cost of capital to the firm than does common
stock.
By
law in most states, all preferred stock must be cumulative, meaning that the
compounded total of all unpaid preferred dividends must be paid before any
dividends can be paid on the firms common stock.
From
the issuers point of view, preferred stock is less risky than bonds.
Whereas
common stock has an indefinite life, preferred stocks always have a specific
maturity date, generally 25 years or less.
Unlike
bonds, preferred stock cannot have a convertible feature.
8
points
Question
15
Firms
use defensive tactics to fight off undesired mergers. These tactics do
not include
Answer

raising
antitrust issues.
getting
a white squire to purchase stock in the firm.
getting
white knights to bid for the firm.
repurchasing
their own stock.
changing
the bylaws to eliminate supermajority voting requirements.
8
points
Question
16
Which
of the following statements is most CORRECT?
Answer

The
acquiring firms required rate of return in most horizontal
mergers will not be affected, because the 2 firms will have similar betas.
Financial
theory says that the choice of how to pay for a merger is really irrelevant
because, although it may affect the firm’s capital structure, it will not
affect its overall required rate of return.
The
basic rationale for any financial merger is synergy and, thus, the
estimation of proforma cash flows is the single most important part of the
analysis.
In
most mergers, the benefits of synergy and the premium the acquirer pays over
the market price are summed and then divided equally between the shareholders
of the acquiring and target firms.
The
primary rationale for most operating mergers is synergy.
8 points
Question
17
In
the lease versus buy decision, leasing is often preferable
Answer

because,
generally, no down payment is required, and there are no indirect interest
costs.
because
lease obligations do not affect the firms risk as seen by investors.
because
the lessee owns the property at the end of the least term.
because
the lessee may have greater flexibility in abandoning the project in which the
leased property is used than if the lessee bought and owned the asset.
8
points
Question
18
Which
of the following statements concerning common stock and the investment banking
process is NOT CORRECT?
Answer

The
preemptive right gives each existing common stockholder the right to purchase
his or her proportionate share of a new stock issue.
If
a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in
the primary market.
Listing
a large firm’s stock is often considered to be beneficial to stockholders
because the increases in liquidity and reputation probably outweigh the
additional costs to the firm.
Stockholders
have the right to elect the firm’s directors, who in turn select the officers
who manage the business. If stockholders are dissatisfied with
management’s performance, an outside group may ask the stockholders to vote for
it in an effort to take control of the business. This action is called a tender
offer.
The
announcement of a large issue of new stock could cause the stock price to
fall. This loss is called “market pressure,” and it is treated
as a flotation cost because it is a cost to stockholders that is associated
with the new issue.
8
points
Question
19
New
York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14%
coupon, 30-year bond issue that was issued 5 years ago. It has been
amortizing $3 million of flotation costs on these bonds over their 30-year
life. The company could sell a new issue of 25-year bonds at an annual
interest rate of 11.67% in today’s market. A call premium of 14% would be
required to retire the old bonds, and flotation costs on the new issue would
amount to $3 million. NYW’s marginal tax rate is 40%. The new bonds
would be issued when the old bonds are called.
What will the after-tax annual interest savings for NYW be if the
refunding takes place?
Answer

$664,050
$699,000
$768,900
$845,790
$930,369
8 points
Question
20
The
City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment,
tax-exempt muni bonds 10 years ago. The bonds had 10 years of call
protection, but now the bonds can be called if the city chooses to do so.
The call premium would be 6% of the face amount. New 20-year, 6%, semiannual
payment bonds can be sold at par, but flotation costs on this issue would be 2%
of the amount of bonds sold. What is the net present value of the
refunding? Note that cities pay no income taxes, hence taxes are not
relevant.
Answer

$453,443
$476,115
$499,921
$524,917
$551,163
8 points
Question
21
Warren
Corporations stock sells for $42 per share. The company wants to sell
some 20-year, annual interest, $1,000 par value bonds. Each bond would
have 75 warrants attached to it, each exercisable into one share of stock at an
exercise price of $47. The firms straight bonds yield 10%. Each
warrant is expected to have a market value of $2.00 given that the stock sells
for $42. What coupon interest rate must the company set on the bonds in order
to sell the bonds-with-warrants at par?
Answer

7.83%
8.24%
8.65%
9.08%
9.54%
8
points
Question
22
Upstate
Water Company just sold a bond with 50 warrants attached. The bonds have
a 20-year maturity and an annual coupon of 12%, and they were issued at their
$1,000 par value. The current yield on similar straight bonds is
15%. What is the implied value of each warrant?
Answer

$3.76
$3.94
$4.14
$4.35
$4.56
8 points
Question
23
Chocolate
Factory’s convertible debentures were issued at their $1,000 par value in
2009. At any time prior to maturity on February 1, 2029, a debenture
holder can exchange a bond for 25 shares of common stock. What is the
conversion price, Pc?
Answer

$40.00
$42.00
$44.10
$46.31
$48.62
8
points
Question
24
A
parent holding company sells shares in its subsidiary such that the parent now
owns only 65% of the subsidiary and, thus, the tax returns of the parent and
its subsidiary can’t be consolidated. The parent receives annual
dividends from the subsidiary of $2,500,000. If the parent’s marginal tax
rate is 34% and if the exclusion on intercompany dividends is 70%, what is the
effective tax rate on the intercompany dividends, and how much net dividends
are received?
Answer

10.2%;
$2,245,000
10.2%;
$2,135,000
23.8%;
$1,905,000
10.2%;
$1,750,000
34.0%;
$1,650,000
8 points
Question
25
Kelly
Tubes is considering a merger with Reilly Tires. Reillys
market-determined beta is 0.9, and the firm currently is financed with 20%
debt, at an interest rate of 8%, and its tax rate is 25%. If Kelly
acquires Reilly, it will increase the debt to 60%, at an interest rate of 9%,
and the tax rate will increase to 35%. The risk-free rate is 6% and the
market risk premium is 4%. What will Reillys required rate of return on
equity be after it is acquired?
Answer

7.4%
8.9%
9.3%
9.6%
9.7%
8 points

Question
1 Which
of the following statements about valuing a firm using the APV approach is most
CORRECT?Answer
The
horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the levered cost of equity.The
horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the cost of debt.The
horizon value is calculated by discounting the expected earnings at the WACC.The
horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the WACC.The
horizon value must always be more than 20 years in the future.8
points Question
2 Operating
leases often have terms that includeAnswer
maintenance
of the equipment by the lessor.full
amortization over the life of the lease.very
high penalties if the lease is cancelled.restrictions
on how much the leased property can be used.much
longer lease periods than for most financial leases.8
points Question
3 From
the lessee viewpoint, the riskiness of the cash flows, with the possible
exception of the residual value, is about the same as the riskiness of the
lessee’sAnswer
equity
cash flows.capital
budgeting project cash flows.debt
cash flows.pension
fund cash flows.sales.
8 points Question
4 Which
of the following is generally NOT true and an advantage of going
public?Answer
Facilitates
stockholder diversification.Increases
the liquidity of the firm’s stock.Makes
it easier to obtain new equity capital.Establishes
a market value for the firm.Makes
it easier for owner-managers to engage in profitable self-dealings.8
points Question
5 Which
of the following statements is NOT
CORRECT?Answer
When
a corporations shares are owned by a few individuals who own most of the stock
or are part of the firms management, we say that the firm is closely, or
privately, held.Going
public establishes a firms true intrinsic value and ensures that a liquid
market will always exist for the firms shares.Publicly
owned companies have sold shares to investors who are not associated with
management, and they must register with and report to a regulatory agency such
as the SEC.When
stock in a closely held corporation is offered to the public for the first
time, the transaction is called going public, and the market for such stock
is called the new issue market.It
is possible for a firm to go public and yet not raise any additional new
capital.8
points Question
6 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 whats
probably a lower cost, diversification benefits is generally not a valid motive
for a publicly held firm.Operating
economies are never a motive for mergers.

8 points Question
7 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.Hostle
mergers always create value for the acquiring firm.In
a tender offer, the target firms management always remain after the merger is
completed.8
points Question
8 Which
of the following statements is most CORRECT?Answer
If
new debt is used to refund old debt, the correct discount rate to use in the
refunding analysis is the before-tax cost of new debt.The
key benefits associated with refunding debt are the reduction in the firm’s
debt ratio and the creation of more reserve borrowing capacity.The
mechanics of finding the NPV of a refunding decision are fairly
straightforward. However, the decision of when to refund is not always
clear because it requires a forecast of future interest rates.If
a firm with a positive NPV refunding project delays refunding and interest
rates rise, the firm can still obtain the entire NPV by locking in a low coupon
rate when the rates are low, even though it actually refunds the debt after
rates have risen.Suppose
a firm is considering refunding and interest rates rise during time when the
analysis is being done. The rise in rates would tend to lower the
expected price of the new bonds, which would make them cheaper to the firm and
thus increase the expected interest savings.8
points Question
9 Which
of the following statements is most CORRECT?Answer
In
a private placement, securities are sold to private (individual) investors
rather than to institutions.Private
placements occur most frequently with stocks, but bonds can also be sold in a
private placement.Private
placements are convenient for issuers, but the convenience is offset by higher
flotation costs.The
SEC requires that all private placements be handled by a registered investment
banker.Private
placements can generally bring in funds faster than is the case with public
offerings.8
points Question
10 Chapter
7 of the Bankruptcy Act is designed to do which of the following?Answer
Protect
shareholders against creditors.Establish
the rules of reorganization for firms with projected cash flows that eventually
will be sufficient to meet debt payments.Ensure
that the firm is viable after emerging from bankruptcy.Allow
the firm to negotiate with each creditor individually.Provide
safeguards against the withdrawal of assets by the owners of the bankrupt firm
and allow insolvent debtors to discharge all of their obligations and to start
over unhampered by a burden of prior debt.8
points Question
11 Which
of the following statements is most CORRECT?Answer
Leveraged
buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a
firm public.In
a typical LBO, bondholders do well but shareholders see their value decline.Firms
are forbidden by law to sell any assets during the first five years following a
leverage buyout.LBOs
are never backed by private equity firms.LBOs
typically use a lot of debt.8
points Question
12 Financial
Accounting Standards Board (FASB) Statement #13 requires that for an
unqualified audit report, financial (or capital) leases must be included in the
balance sheet by reporting theAnswer
residual
value as a fixed asset.residual
value as a liability.present
value of future lease payments as an asset and also showing this same amount as
an offsetting liability.undiscounted
sum of future lease payments as an asset and as an offsetting liability.undiscounted
sum of future lease payments, less the residual value, as an asset and as an
offsetting liability.8
points Question
13 Which
of the following statements concerning warrants is correct?Answer
Bonds
with warrants and convertible bonds both have option features that their
holders can exercise if the underlying stocks price increases. However, if the
option is exercised, the issuing companys debt declines if warrants were used
but remains the same if it used convertibles.Warrants
are long-term put options that have value because holders can sell the firms
common stock at the exercise price regardless of how low the market price
drops.Warrants
are long-term call options that have value because holders can buy the firms
common stock at the exercise price regardless of how high the stocks price has
risen.A
firms investors would generally prefer to see it issue bonds with warrants
than straight bonds because the warrants dilute the value of new shareholders,
and that value is transferred to existing shareholders.A
drawback to using warrants is that if the firm is very successful, investors
will be less likely to exercise the warrants, and this will deprive the firm of
receiving any new capital.8
points Question
14 Which
of the following statements is most CORRECT?Answer
Preferred
stock generally has a higher component cost of capital to the firm than does common
stock.By
law in most states, all preferred stock must be cumulative, meaning that the
compounded total of all unpaid preferred dividends must be paid before any
dividends can be paid on the firms common stock.From
the issuers point of view, preferred stock is less risky than bonds.Whereas
common stock has an indefinite life, preferred stocks always have a specific
maturity date, generally 25 years or less.Unlike
bonds, preferred stock cannot have a convertible feature.8
points Question
15 Firms
use defensive tactics to fight off undesired mergers. These tactics do
not includeAnswer
raising
antitrust issues.getting
a white squire to purchase stock in the firm.getting
white knights to bid for the firm.repurchasing
their own stock.changing
the bylaws to eliminate supermajority voting requirements.8
points Question
16 Which
of the following statements is most CORRECT?Answer
The
acquiring firms required rate of return in most horizontal
mergers will not be affected, because the 2 firms will have similar betas.Financial
theory says that the choice of how to pay for a merger is really irrelevant
because, although it may affect the firm’s capital structure, it will not
affect its overall required rate of return.The
basic rationale for any financial merger is synergy and, thus, the
estimation of proforma cash flows is the single most important part of the
analysis.In
most mergers, the benefits of synergy and the premium the acquirer pays over
the market price are summed and then divided equally between the shareholders
of the acquiring and target firms.The
primary rationale for most operating mergers is synergy.
8 points Question
17 In
the lease versus buy decision, leasing is often preferableAnswer
because,
generally, no down payment is required, and there are no indirect interest
costs.because
lease obligations do not affect the firms risk as seen by investors.because
the lessee owns the property at the end of the least term.because
the lessee may have greater flexibility in abandoning the project in which the
leased property is used than if the lessee bought and owned the asset.8
points Question
18 Which
of the following statements concerning common stock and the investment banking
process is NOT CORRECT?Answer
The
preemptive right gives each existing common stockholder the right to purchase
his or her proportionate share of a new stock issue.If
a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in
the primary market.Listing
a large firm’s stock is often considered to be beneficial to stockholders
because the increases in liquidity and reputation probably outweigh the
additional costs to the firm.Stockholders
have the right to elect the firm’s directors, who in turn select the officers
who manage the business. If stockholders are dissatisfied with
management’s performance, an outside group may ask the stockholders to vote for
it in an effort to take control of the business. This action is called a tender
offer.The
announcement of a large issue of new stock could cause the stock price to
fall. This loss is called “market pressure,” and it is treated
as a flotation cost because it is a cost to stockholders that is associated
with the new issue.8
points Question
19 New
York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14%
coupon, 30-year bond issue that was issued 5 years ago. It has been
amortizing $3 million of flotation costs on these bonds over their 30-year
life. The company could sell a new issue of 25-year bonds at an annual
interest rate of 11.67% in today’s market. A call premium of 14% would be
required to retire the old bonds, and flotation costs on the new issue would
amount to $3 million. NYW’s marginal tax rate is 40%. The new bonds
would be issued when the old bonds are called.
What will the after-tax annual interest savings for NYW be if the
refunding takes place?Answer
$664,050$699,000$768,900$845,790$930,369
8 points Question
20 The
City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment,
tax-exempt muni bonds 10 years ago. The bonds had 10 years of call
protection, but now the bonds can be called if the city chooses to do so.
The call premium would be 6% of the face amount. New 20-year, 6%, semiannual
payment bonds can be sold at par, but flotation costs on this issue would be 2%
of the amount of bonds sold. What is the net present value of the
refunding? Note that cities pay no income taxes, hence taxes are not
relevant.Answer
$453,443$476,115$499,921$524,917$551,163
8 points Question
21 Warren
Corporations stock sells for $42 per share. The company wants to sell
some 20-year, annual interest, $1,000 par value bonds. Each bond would
have 75 warrants attached to it, each exercisable into one share of stock at an
exercise price of $47. The firms straight bonds yield 10%. Each
warrant is expected to have a market value of $2.00 given that the stock sells
for $42. What coupon interest rate must the company set on the bonds in order
to sell the bonds-with-warrants at par?Answer
7.83%8.24%8.65%9.08%9.54%8
points Question
22 Upstate
Water Company just sold a bond with 50 warrants attached. The bonds have
a 20-year maturity and an annual coupon of 12%, and they were issued at their
$1,000 par value. The current yield on similar straight bonds is
15%. What is the implied value of each warrant?Answer
$3.76$3.94$4.14$4.35$4.56
8 points Question
23 Chocolate
Factory’s convertible debentures were issued at their $1,000 par value in
2009. At any time prior to maturity on February 1, 2029, a debenture
holder can exchange a bond for 25 shares of common stock. What is the
conversion price, Pc?Answer
$40.00$42.00$44.10$46.31$48.628
points Question
24 A
parent holding company sells shares in its subsidiary such that the parent now
owns only 65% of the subsidiary and, thus, the tax returns of the parent and
its subsidiary can’t be consolidated. The parent receives annual
dividends from the subsidiary of $2,500,000. If the parent’s marginal tax
rate is 34% and if the exclusion on intercompany dividends is 70%, what is the
effective tax rate on the intercompany dividends, and how much net dividends
are received?Answer
10.2%;
$2,245,00010.2%;
$2,135,00023.8%;
$1,905,00010.2%;
$1,750,00034.0%;
$1,650,000
8 points Question
25 Kelly
Tubes is considering a merger with Reilly Tires. Reillys
market-determined beta is 0.9, and the firm currently is financed with 20%
debt, at an interest rate of 8%, and its tax rate is 25%. If Kelly
acquires Reilly, it will increase the debt to 60%, at an interest rate of 9%,
and the tax rate will increase to 35%. The risk-free rate is 6% and the
market risk premium is 4%. What will Reillys required rate of return on
equity be after it is acquired?Answer
7.4%8.9%9.3%9.6%9.7%
8 points

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