FINAL MOCK EXAM

3. The market's reaction to the announcement of a change in the firm's dividend payout is likely the:
A. clientele effect.
B. efficient markets hypothesis.
C. information content effect.
D. MM Proposition I.

1. An equity issue sold directly to the public is called:

A. a rights offer.
B. a general cash offer.
C. a restricted placement.
D. a fully funded sales.

2. An equity issue sold to the firm's existing stockholders is called:

A. a rights offer.
B. a general cash offer.
C. a private placement.
D. an underpriced issue.

3. Management's first step in any issue of securities to the public is:

A. to file a registration form with the SEC.
B. to distribute copies of the preliminary prospectus.
C. to distribute copies of the final prospectus.
D. to obtain approval from the board of directors.

4. A rights offering is:

A. the issuing of options on shares to the general public to acquire stock.
B. the issuing of an option directly to the existing shareholders to acquire stock.
C. the issuing of proxies which are used by shareholders to exercise their voting rights.
D. strictly a public market claim on the company which can be traded on an exchange.

4. Payments made out of a firm's earnings to its owners in the form of cash or stock are called:
A. dividends.
B. distributions.
C. share repurchases.
D. payments-in-kind.

5. The date by which a stockholder must be registered as having share ownership in order to receive a
declared dividend is called the:
A. ex-rights date.
B. ex-dividend date.
C. date of record.
D. date of payment.

5. Companies use tombstone advertisements in the financial press to:

A. announce the death of the company.
B. announce the failure of a financial strategy.
C. announce the availability of a new issue of a corporate security.
D. notify the public of foreclosure.

15. The Wordsmith Corporation has 10,000 shares outstanding at $30 each. They expect to raise $150,000
by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share?
A. 0.60
B. 1.20
C. 1.67
D. 2.0
Outstanding shares
Number of rights per new share=
New shares issued
Total fundsraised
New shares= =150,00025=6,000
Subscription price
10,000
¿> Rights per new share= =1.67
6,000

6. A firm has a market value equal to its book value. Currently, the firm has excess cash of $400 and other
assets of $7,600. Equity is worth $8,000. The firm has 200 shares of stock outstanding and net income of
$900. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per
share be after the dividend is paid?
A. $0.25
B. $0.45
C. $2.50
D. $4.50
Net Income
Earnings per Share=
Shares Outstanding
Earnings per share=$ 900200=$ 4.50

7. A new public equity issue from a company with equity previously outstanding is called a(n):
A. initial public offering.
B. seasoned equity issue.
C. unseasoned equity issue.
D. private placement.

8. A group of investment bankers who pool their efforts to underwrite a security are known as a(n):
A. amalgamate.
B. conglomerate.
C. green shoe group.
D. syndicate.

9. Which of the following statements is true?

A. The subscription price is generally above the old stock price.
B. The subscription price is generally above the ex-rights price.
C. The subscription price is generally below the old stock price.
D. Both A and B.
10. Which of the following would not be a characteristic of a financial lease?
A. They are not usually fully amortized.
B. They usually do not have maintenance necessary for the leased assets.
C. They usually do not include a cancellation option.
D. The lessee usually has the right to renew the lease at expiration.
11. If the lessor borrows much of the purchase price of a leased asset, the lease is called:
A. a leveraged lease.
B. a sale-and-leaseback.
C. a capital lease.
D. a nonrecourse lease.
18. Paris sold some buildings and used the proceeds to improve its financial position. The city then leased
the buildings back in order to continue to use these facilities. This is an example of:
A. an operating lease.
B. a short-term lease.
C. a sale and leaseback.
D. a fully amortized lease.
12. An advantage of leasing is that the lessor does not own the asset and can cancel:
A. only financial leases.
B. only operating leases.
C. only capital leases.
D. any kind of leases anytime.

13. A merger in which an entirely new firm is created and both the acquired and acquiring firms cease to
exist is called a:
A. divestiture.
B. consolidation.
C. tender offer.
D. spinoff.

14. A reason for acquisitions is synergy. Synergy includes:

A. revenue enhancements.
B. cost reductions.
C. lower taxes.
D. All of the above.

15. Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A for $425
because they thought the combination of the new Firm VA was worth $925. What is the NPV from the
merger of Firm V and Firm A?
A. $0
B. $50
C. $425
D. $450
NPV =Value of merged firm−Value of Firm V −Value of Firm A−Premium paid
Net Present Value=$ 925−$ 450−$ 375−($ 425−$ 375)=$ 50

Essay Questions:
1. Lee Ann, Inc., has declared a $9.50 per-share dividend. Suppose capital gains are not taxed, but dividends
are taxed at 15 percent. New IRS regulations require that taxes be withheld when the dividend is paid. Lee
Ann sells for $115 per share, and the stock is about to go exdividend. What do you think the ex-dividend
price will be?
Solution:
The aftertax dividend is the pretax dividend times one minus the tax rate, so:

After−tax dividend=Pretax dividend ×(1−Tax rate)

Aftertax dividend = $9.50(1 – .15) = $8.08

The stock price should drop by the aftertax dividend amount, or:
Ex−dividend price=Stock price before dividend− After−tax dividend
Ex-dividend price = $115 – 8.08 = $106.93

2. 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?
b. RC has a 15 percent stock dividend?
c. RC has a 42.5 percent stock dividend?
d. RC has a four-for-seven reverse stock split?
Determine the new number of shares outstanding in parts (a) through (d).

Solution: To find the new stock price, we multiply the current stock price by the ratio of old shares to new
shares, so:
Old Shares
New Price=Old Price ×
New Shares
a. $64(3/5) = $38.40
b. $64(1/1.15) = $55.65
c. $64(1/1.425) = $44.91
d. $64(7/4) = $112.00
New Shares
Reverse Stock Split : New Price=Old Price ×
Old Shares

To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new
shares to old shares, so:
New Shares
New Shares=Old Shares ×
Old Shares
a: 330,000(5/3) = 550,000
b: 330,000(1.15) = 379,500
c: 330,000(1.425) = 470,250
d: 330,000(4/7) = 188,571

3. Again, Inc., is proposing a rights offering. Presently, there are 550,000 shares outstanding at $87 each.
There will be 85,000 new shares offered at $81 each.
a. What is the new market value of the company?
b. How many rights are associated with one of the new shares?
c. What is the ex-rights price?
d. What is the value of a right?
e. Why might a company have a rights offering rather than a general cash offer?
Solution:
a. The new market value will be the current shares outstanding times the stock price plus the rights
offered times the rights price, so:
New Market Value=(Old Shares× Old Price)+(New Shares× New Price)
New market value = 550,000($87) + 85,000($81) = $54,735,000
b. The number of rights associated with the old shares is the number of shares outstanding divided by
the rights offered, so:
Old Shares
Rights per new share=
New Shares
550,000 old shares
Number of rights needed= =6.47 rights per new share
85,000 new shares
c. The new price of the stock will be the new market value of the company divided by the total number
of shares outstanding after the rights offer, which will be:
New Market Value
Giá cổ phiếu sau quyền (Ex-rights price): P X =
Total Shares Outstanding
PX = $54,735,000/(550,000 + 85,000) = $86.20
d. The value of the right:
Value of a ¿=Old Price−P X
Value of a right = $87.00 – 86.20 = $.80
e. A rights offering usually costs less, it protects the proportionate interests of existing share-holders
and also protects against underpricing.
Lý do chọn quyền mua thay vì phát hành tiền mặt
 Chi phí thấp hơn: Quyền mua thường ít tốn kém hơn so với phát hành cổ phiếu ra công chúng.
 Bảo vệ cổ đông hiện tại: Giúp cổ đông duy trì tỷ lệ sở hữu của họ.
 Tránh định giá thấp: Giảm rủi ro cổ phiếu bị bán với giá thấp hơn giá trị thực.

4. You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a
common practice with expensive, high-tech equipment). The scanner costs $5,200,000, and it would be
depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be
completely valueless in four years. You can lease it for $1,525,000 per year for four years.
a) Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or
buy?
b) What are the cash flows from the lease from the lessor’s viewpoint? Assume a 35 percent tax bracket.
c) What would the lease payment have to be for both the lessor and the lessee to be indifferent about the
lease?

Depreciation Tax Shield (Lợi ích thuế từ khấu hao)

Depreciation Tax Shield=Depreciation Expense× Tax Rate
¿ (
Giá thiết bị
Số năm khấu hao
× Thuế suất)
2️⃣ After-Tax Lease Payment (Chi phí thuê sau thuế)
After-Tax Lease Payment=Lease Payment ×(1−Thuế suất)

3️⃣ Operating Cash Flow (OCF - Dòng tiền hoạt động từ việc thuê)
OCF=Depreciation Tax Shield+ After-Tax Lease Payment

4️⃣ After-Tax Cost of Debt (Chi phí vốn vay sau thuế)
After-Tax Cost of Debt=Lãi suất trước thuế ×(1−Thuế suất )
5️⃣ Net Advantage to Leasing (NAL - Lợi ích ròng từ việc thuê)
NAL=Giá thiết bị−OCF × PVIFA (Chi phí vốn vay , Số năm)
 Nếu NAL > 0, nên thuê. Nếu NAL < 0, nên mua.

6️⃣ Break-even Lease Payment (Khoản thanh toán thuê hòa vốn)
Tìm OCF để NAL = 0:
0=Giá thiết bị−OCF × PVIFA (Chi phí vốn vay , Số năm )

Present Value Interest Factor of Annuity (Hệ số giá trị hiện tại của niên kim). Nó được
sử dụng để tính giá trị hiện tại của một chuỗi các khoản thanh toán định kỳ bằng
nhau. PVIFA=1−¿ ¿. Trong đó: r = Lãi suất mỗi kỳ, n = Số kỳ thanh toán

Giải ra OCF, rồi tính:

After-Tax Lease Payment=OCF −Depreciation Tax Shield

Cuối cùng, tìm Breakeven Lease Payment:

After-Tax Lease Payment
Breakeven Lease Payment=
1−Thuế suất

Solution:

We will calculate cash flows from the depreciation tax shield first. The depreciation tax shield is:

 Depreciation tax shield = ($5,200,000/4)(.35) = $455,000

 The aftertax cost of the lease payments will be:
 Aftertax lease payment = ($1,525,000)(1 – .35) = $991,250

So, the total cash flows from leasing are:

 OCF = $455,000 + 991,250 = $1,446,250
 The aftertax cost of debt is:
 Aftertax debt cost = .08(1 – .35) = .052
 Using all of this information, we can calculate the NAL as:
 NAL = $5,200,000 – $1,446,250(PVIFA5.20%,4) = $95,405.02
 The NAL is positive so you should lease.

2. If we assume the lessor has the same cost of debt and the same tax rate, the NAL to the lessor is the
negative of our company’s NAL, so: NAL = – $95,405.02

3. To find the maximum lease payment that would satisfy both the lessor and the lessee, we need to find the
payment that makes the NAL equal to zero. Using the NAL equation and solving for the OCF, we find:
 NAL = 0 = $5,200,000 – OCF(PVIFA5.20%,4)
 OCF = $1,473,280.45
The OCF for this lease is composed of the depreciation tax shield cash flow, as well as the aftertax lease
payment. Subtracting out the depreciation tax shield cash flow we calculated earlier, we find:
Aftertax lease payment = $1,473,280.45 – 455,000 = $1,018,280.45
Since this is the aftertax lease payment, we can now calculate the breakeven pretax lease payment as:
Breakeven lease payment = $1,018,280.45/(1 – .35) = $1,566,585.31

5. Evan, Inc., has offered $340 million cash for all of the common stock in Tanner Corporation. Based on
recent market information, Tanner is worth $317 million as an independent operation. If the merger makes
economic sense for Evan, what is the minimum estimated value of the synergistic benefits from the merger?

Solution: For the merger to make economic sense, the acquirer must feel the acquisition will
increase value by at least the amount of the premium over the market value, so:

Minimum economic value = $340,000,000 – 317,000,000 = $23,000,000

The minimum estimated value of the synergistic benefits from the merger:
Synergistic Benefits=Price Paid−Standalone Value
Standalone Market Value có nghĩa là giá trị thị trường độc lập, tức là giá trị của một công ty hoặc tài sản
nếu hoạt động riêng lẻ, không bị ảnh hưởng bởi các yếu tố bên ngoài như sáp nhập, mua lại hoặc hợp tác
chiến lược.