BUSE 2000 TEST 2 2011 1. A large firm is receiving a loan guarantee from the government.

Because of the guarantee, the firm is able to borrow R50 million for five years at 8% interest rate per year. The opportunity cost of capital is 10% per year. Calculate the approximate value of the guarantee to the firm. (Ignore taxes.) a. +R53 790 000.00 b. R 3 790 786.77 c. +R 3 790 786.77 d. +R15 970 840.15 e. +R15 163 147.08 2. Which of the following is a statement of weak form efficiency? I) If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns II) If the markets are efficient in the weak form, then prices will adjust immediately to public information III) If the markets are efficient in the weak form, then prices reflect all information a. I only b. II only c. II and III only d. III only e. I and II only 3. Which of the following is a statement of semi-strong form efficiency? I) If the markets are efficient in the semi-strong form then prices reflect all information II) If the markets are efficient in the semi-strong form then prices will adjust to newly published information after a long time delay III) If the markets are efficient in the semi-strong form then prices will adjust immediately to public information a. I only b. II only c. II and III only d. III only e. I,II and III

4. Expo Steel Company has had a very successful year and earnings available for common stockholders are R20million. The company has 10 million shares outstanding and has a dividend payout ratio of 20%. The company is subject to a 30 percent tax rate. What is the dividend per share and retained earnings amount for the year? a. R2.00 per share & R20 million b. R0.28 per share & R11.2 million c. R0.28 per share & R14 million d. R0.40 per share & R11.2 million e. R0.40 per share & R16 million

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BUSE 2000 TEST 2 2011 5. The equity account of Info Tech Company is as follows:

Description Ordinary shares (R1 par value) Additional paid in capital Retained earnings Treasury shares at cost Net value of equity

Amount (Rands) 10 000 000 50 000 000 125 000 000 1 000 000 186 000 000

Suppose that the company issues 2,000,000 new shares at a price of R20 per share. What is the new value of the additional paid-in-capital account? a. R38,000,000 b. R40,000,000 c. R70,000,000 d. R88,000,000 e. R50 000 000 6. The following functions are provided by financial intermediaries for the smooth functioning of the economy: I) The payment mechanism II) Borrowing and lending III) Pooling risk a. I only b. I and II only c. I, II, and III d. III only e. II only 7. Arrange the following in the chronological order for a startup firm: I) Mezzanine financing; II) Stage 1 and 2 ... financing; III) IPO and; IV) Zero stage financing a. IV, II, III, and I b. IV, II, I, and III c. IV, I, II, and III d. II, I, III, and IV e. I, II, III, and IV 8. A government wishes to auction 6 million bonds (quantity) and four potential buyers submit bids. Price R1015 R900 R750 R720 Quantity 2 Million 3 Million 1 Million 1 Million

Buyer A Buyer B Buyer C Buyer D

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BUSE 2000 TEST 2 2011 9. In a discriminatory auction: a. Buyer A pays R1 015 and Buyer B Pays R900, Buyer C pays R750, and Buyer D pays R720 b. Buyer A pays R 750, Buyer B pays R 750, Buyer C pays R750 and Buyer D pays R750 c. Buyer A pays R 720, Buyer B pays R720, Buyer C pays R720 and Buyer D paysR720 d. Buyer A pays R1015 and Buyer B Pays R900, and Buyer C pays R750 e. The government will receive R4 500 million in proceeds from the auction

10. Greenmail refers to the practice of a company purchasing its stock, usually at a high price, from: a. Small shareholders who are happy with performance of the firm b. A hostile shareholder who threatens to take over the firm c. Large shareholders who are happy with performance of the firm d. the management of the company e. the venture capital investors who wish to sell off their investment 11. A firm has a total market value of R20 million and equity has a market value of R15 million. What is the approximate after-tax weighted average cost of capital if the after tax cost of debt is 12%, the cost of equity is 17% and the tax rate is 28%? a. 15.75% b. 13.00% c. 12.82% d. 12.50% e. 14.91% 12. ABC Company is financed entirely by common stock that is priced to offer a 17% expected return. If the company repurchases 45% of the common stock and substitutes an equal value of debt yielding 8%, what is the approximate expected return on the common stock after refinancing? (Ignore taxes.) a. 18.00% b. 21.05% c. 9.64% d. 28.00% e. 24.36%

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BUSE 2000 TEST 2 2011 13. Risk shifting implies: a. When faced with bankruptcy, managers do not invest more equity capital b. When faced with bankruptcy, managers tend to invest in high risk, high return projects c. When faced with bankruptcy; managers may make accounting changes to conceal the true extent of the problem d. When faced with bankruptcy, managers may delay the onset of bankruptcy as long as they can e. None of the above 14. If a firm borrows R50 million for one year at an interest rate of 10%, what is the present value of the interest tax shield? Assume a 30% tax rate. (Approximately.) a. R1.36 million b. R1.5 million c. R1.0 million d. R4.55 million e. None of the above 15. MM Proposition I with corporate taxes states that: I) Capital structure can affect firm value by an amount that is equal to the present value of the interest tax shield II) By raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value III) Firm value is maximized at an all debt capital structure a. I only b. II only c. III only d. I, II, and III e. None of the above

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BUSE 2000 TEST 2 2011 16. Assume the corporate tax rate is 30%. The firm has no debt in its capital structure. It is valued at R100 million. What would be the value of the firm if it issued R50m in perpetual debt and repurchased the equity? a. R 65 million b. R115 million c. R100 million d. R150 million e. None of the above

17. The relative tax advantage of debt with personal and corporate taxes is: Where: T C= (Corporate tax rate) = 35%; TPE= Personal tax rate on equity income = 30%; and T P= Personal tax rate on interest income = 20%: (approximately) a. 1.76 b. 1.16 c. 1.35 d. 1.02 e. None of the above

18. In an EPS - Operating Income graphical relationship, the slope of the debt line is steeper than the equity line. The debt line has a negative value for intercept because: a. The break-even point is higher with debt b. A fixed interest charge must be paid even at low earnings c. The amount of interest per share has only a positive effect on the intercept d. The higher the interest rate the greater the slope e. None of the above

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BUSE 2000 TEST 2 2011 19. Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to: I) Meet interest and principal payments which if not met can put the company into financial distress II) Make dividend payments which if not met can put the company into financial distress III) Meet both interest and dividend payments which when met increase the firm cash flow IV) Meet increased tax payments thereby increasing firm value a. I only b. II only c. II and III only d. III and IV only e. I, II, and IV

20. According to the trade-off theory of capital structure: a. Optimal capital structure is reached when the present value of tax savings on account of additional borrowing is just offset by increases in the present value of costs of distress b. Optimal capital structure is reached when stockholders' right to default is balanced by the the bondholders' right to get interest and principal payments c. Optimal capital structure is reached when the benefits of limited liability is just offset by the value of the lawyers' claim d. Optimal capital structure is reached when the present value of tax savings is greater than the present value of the costs of financial distress e. None of the above

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