MBA 621 EXAM 2 QUESTIONS WITH VERIFIED ANSWERS
Correct 79
Incorrect 00
1 of 79
Term
If Ideko's future free cash flow expected growth is 5% and its WACC
9%, and the estimated free cash flow for 2011 is $11,150.65. Its
continuation value ( terminal value) in 2010 is closest to:
Give this one a try later!
the present value of the interest tax
mortgage-backed security
shield.
Interest expense x (τC) = 175x 0.21 = = 11,150.65/(0.09 - 0.05) =
$36.75 $278,766
37 million $ 278,770
Don't know?
, 2 of 79
Term
Using textbook Tables 19.5 and 19.7, if Ideko has an EV/EBITDA multiple
of 8.5, then its continuation value for equity in 2010 is closes to:
Give this one a try later!
Venture capitalists typically control about three-quarters of the seats on a start-up's
board of directors, and often represent the single largest voting block on the
board.
Continuation Enterprise Value = 32,094x 8.5 = 272,799
Its debt in 2010 is projected to be 120,000
Its Continuation Equity Value is 272,799 - 120,000 = 152,799
$152.8 million
With perfect capital markets, a firm's WACC is dependent of its capital structure and
is equal to its equity cost of capital only the firm it is unlevered.
The underwriter purchases the entire issue (at the offer price) and then resells it at a
slightly higher price to interested investors.
Don't know?
3 of 79
Term
,Flagstaff Enterprises expected to have free cash flow in the coming
year of $8 million, and this free cash flow is expected to grow at a rate
of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%,
a debt cost of capital of 7%, and it is in the 35% corporate tax bracket.
If Flagstaff maintains a debt to equity ratio of 1, then Flagstaff's pre-tax
WACC is closest to:
Give this one a try later!
10.0% $6.00
11.0% I only
Don't know?
4 of 79
Term
Which of the following statements is FALSE?
- By including more covenants, issuers increase their costs of
borrowing.
- Once bonds are issued, equity holders have an incentive to increase
dividends at the expense of debt holders.
- Covenants may restrict the level of further indebtedness and specify
that the issuer must maintain a minimum amount of working capital.
- If the covenants are designed to reduce agency costs by restricting
management's ability to take negative NPV actions that exploit debt
, holders, then the reduction in the firm's borrowing cost can more than
outweigh the cost of the loss of flexibility associated with covenants.
Give this one a try later!
By increasing the amount paid to
debt holders through interest If the issuer fails to live up to any
payments, the amount of the pre-tax covenant, the issuer goes into
cash flows that must be paid as taxes bankruptcy.
increases.
Agency costs represent another cost
By including more covenants,
of increasing the firm's leverage that
issuers increase their costs of
will affect the firm's optimal capital
borrowing.
structure choice.
Don't know?
5 of 79
Term
Which of the following statements is FALSE?
- Leverage can reduce the degree of managerial entrenchment
because managers are more likely to be fired when a firm faces
financial distress.
- When a firm is highly levered, creditors themselves will closely
monitor the actions of managers, providing an additional layer of
management oversight.
- According to the empire building hypothesis, leverage increases firm
Correct 79
Incorrect 00
1 of 79
Term
If Ideko's future free cash flow expected growth is 5% and its WACC
9%, and the estimated free cash flow for 2011 is $11,150.65. Its
continuation value ( terminal value) in 2010 is closest to:
Give this one a try later!
the present value of the interest tax
mortgage-backed security
shield.
Interest expense x (τC) = 175x 0.21 = = 11,150.65/(0.09 - 0.05) =
$36.75 $278,766
37 million $ 278,770
Don't know?
, 2 of 79
Term
Using textbook Tables 19.5 and 19.7, if Ideko has an EV/EBITDA multiple
of 8.5, then its continuation value for equity in 2010 is closes to:
Give this one a try later!
Venture capitalists typically control about three-quarters of the seats on a start-up's
board of directors, and often represent the single largest voting block on the
board.
Continuation Enterprise Value = 32,094x 8.5 = 272,799
Its debt in 2010 is projected to be 120,000
Its Continuation Equity Value is 272,799 - 120,000 = 152,799
$152.8 million
With perfect capital markets, a firm's WACC is dependent of its capital structure and
is equal to its equity cost of capital only the firm it is unlevered.
The underwriter purchases the entire issue (at the offer price) and then resells it at a
slightly higher price to interested investors.
Don't know?
3 of 79
Term
,Flagstaff Enterprises expected to have free cash flow in the coming
year of $8 million, and this free cash flow is expected to grow at a rate
of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%,
a debt cost of capital of 7%, and it is in the 35% corporate tax bracket.
If Flagstaff maintains a debt to equity ratio of 1, then Flagstaff's pre-tax
WACC is closest to:
Give this one a try later!
10.0% $6.00
11.0% I only
Don't know?
4 of 79
Term
Which of the following statements is FALSE?
- By including more covenants, issuers increase their costs of
borrowing.
- Once bonds are issued, equity holders have an incentive to increase
dividends at the expense of debt holders.
- Covenants may restrict the level of further indebtedness and specify
that the issuer must maintain a minimum amount of working capital.
- If the covenants are designed to reduce agency costs by restricting
management's ability to take negative NPV actions that exploit debt
, holders, then the reduction in the firm's borrowing cost can more than
outweigh the cost of the loss of flexibility associated with covenants.
Give this one a try later!
By increasing the amount paid to
debt holders through interest If the issuer fails to live up to any
payments, the amount of the pre-tax covenant, the issuer goes into
cash flows that must be paid as taxes bankruptcy.
increases.
Agency costs represent another cost
By including more covenants,
of increasing the firm's leverage that
issuers increase their costs of
will affect the firm's optimal capital
borrowing.
structure choice.
Don't know?
5 of 79
Term
Which of the following statements is FALSE?
- Leverage can reduce the degree of managerial entrenchment
because managers are more likely to be fired when a firm faces
financial distress.
- When a firm is highly levered, creditors themselves will closely
monitor the actions of managers, providing an additional layer of
management oversight.
- According to the empire building hypothesis, leverage increases firm
