MBA 530 Corporate Finance Final Exam
UPDATED ACTUAL Questions and
CORRECT Answers
Each capital source for an organization may have a different capital cost - CORRECT
ANSWER✔✔- True
As the acting CFO of Oracle Corporation, you have been tasked with increasing the
company's valuation. Several options are under consideration and need your assessment. (10
points each)
The company may issue preferred stock to raise $500 million to fund new wireless
networking products. The products are estimated to provide a 13% IRR. What is WACC
currently? How much would it be if the preferred stock is issued? Is this a feasible
alternative?
Facts: Current debt costs 4.0% (net of tax), current equity costs 12.25%, and the preferred
stock would cost 10.00%. Debt currently is $300 million and equity is $900 million. -
CORRECT ANSWER✔✔- Equity = $900 million
Debt = $300 million
Weightage of equity = 900 / (900+300) = 0.75
Weightage of Debt = 300 / (900+300) = 0.25
Cost of Debt = 4%
Cost of Equity = 12.25 %
WACC = 12.25% * .75 + 4% * .25 = 10.18%
Preferred stock Value = $500 million
Cost of preferred stock = 10%
Weightage of equity = 900 / (900+300+500) = .53
Weightage of Debt = 300 / (900+300+500) = .18
Weightage of Preferred stock = 500 / (900+300+500) = .29
WACC = 12.25%*.53 + 4%*.18 + 10%*.29 = 10.11%
Issuing preferred stock is a feasible alternative to raise fund. The reason is that company can
raise fund without diluting the ownership. Unlike ordinary shares, preferred stockholder has
no voting rights. But company has to give predefined dividend to the preferred stockholders.
Further, Preferred stock is less risky than long-term debt financing. If the firm is unable to
, pay periodic dividend or to redeem preferred stocks at maturity, preferred stockholders
cannot take the company into bankruptcy. Because, from legal point of view, preferred
stockholders are owners of the company.
One source of potential conflict between bond and stockholders is the amount of liquidity the
company should maintain - CORRECT ANSWER✔✔- True
The prospectus for stock and a bonds covenant agreement are legal documents which
describe certain parameters or obligations of the company to holders - CORRECT
ANSWER✔✔- True
In general, the objective of financial management is value creation. - CORRECT
ANSWER✔✔- True
An organization in the maturity stage of operations is more likely to have in place a
consistent and upward moving dividend policy. - CORRECT ANSWER✔✔- True
Financial managers can propose to increase earnings per share of an organization by the
repurchase of the organization's common stock. - CORRECT ANSWER✔✔- True
The current ratio is obtained by dividing the organization's current assets by its current
liabilities. - CORRECT ANSWER✔✔- True
Retained earnings, or reserves, is a source of equity that is to be reported on the income
statement. - CORRECT ANSWER✔✔- False
The sale of a manufacturing facility is part of the operating activities portion of the three-part
cash flow statement. - CORRECT ANSWER✔✔- False
An organization's return on equity will be affected by the organization's operating, investing,
and financing activities. - CORRECT ANSWER✔✔- True
Large institutional investors can have considerable influence over an organization's corporate
finance decisions. - CORRECT ANSWER✔✔- True
UPDATED ACTUAL Questions and
CORRECT Answers
Each capital source for an organization may have a different capital cost - CORRECT
ANSWER✔✔- True
As the acting CFO of Oracle Corporation, you have been tasked with increasing the
company's valuation. Several options are under consideration and need your assessment. (10
points each)
The company may issue preferred stock to raise $500 million to fund new wireless
networking products. The products are estimated to provide a 13% IRR. What is WACC
currently? How much would it be if the preferred stock is issued? Is this a feasible
alternative?
Facts: Current debt costs 4.0% (net of tax), current equity costs 12.25%, and the preferred
stock would cost 10.00%. Debt currently is $300 million and equity is $900 million. -
CORRECT ANSWER✔✔- Equity = $900 million
Debt = $300 million
Weightage of equity = 900 / (900+300) = 0.75
Weightage of Debt = 300 / (900+300) = 0.25
Cost of Debt = 4%
Cost of Equity = 12.25 %
WACC = 12.25% * .75 + 4% * .25 = 10.18%
Preferred stock Value = $500 million
Cost of preferred stock = 10%
Weightage of equity = 900 / (900+300+500) = .53
Weightage of Debt = 300 / (900+300+500) = .18
Weightage of Preferred stock = 500 / (900+300+500) = .29
WACC = 12.25%*.53 + 4%*.18 + 10%*.29 = 10.11%
Issuing preferred stock is a feasible alternative to raise fund. The reason is that company can
raise fund without diluting the ownership. Unlike ordinary shares, preferred stockholder has
no voting rights. But company has to give predefined dividend to the preferred stockholders.
Further, Preferred stock is less risky than long-term debt financing. If the firm is unable to
, pay periodic dividend or to redeem preferred stocks at maturity, preferred stockholders
cannot take the company into bankruptcy. Because, from legal point of view, preferred
stockholders are owners of the company.
One source of potential conflict between bond and stockholders is the amount of liquidity the
company should maintain - CORRECT ANSWER✔✔- True
The prospectus for stock and a bonds covenant agreement are legal documents which
describe certain parameters or obligations of the company to holders - CORRECT
ANSWER✔✔- True
In general, the objective of financial management is value creation. - CORRECT
ANSWER✔✔- True
An organization in the maturity stage of operations is more likely to have in place a
consistent and upward moving dividend policy. - CORRECT ANSWER✔✔- True
Financial managers can propose to increase earnings per share of an organization by the
repurchase of the organization's common stock. - CORRECT ANSWER✔✔- True
The current ratio is obtained by dividing the organization's current assets by its current
liabilities. - CORRECT ANSWER✔✔- True
Retained earnings, or reserves, is a source of equity that is to be reported on the income
statement. - CORRECT ANSWER✔✔- False
The sale of a manufacturing facility is part of the operating activities portion of the three-part
cash flow statement. - CORRECT ANSWER✔✔- False
An organization's return on equity will be affected by the organization's operating, investing,
and financing activities. - CORRECT ANSWER✔✔- True
Large institutional investors can have considerable influence over an organization's corporate
finance decisions. - CORRECT ANSWER✔✔- True
