Corporate Financial Policy (2)

What is the expected pre-money value of the firm? (Note: pre-money value is the value of the firm excluding the new capital raised.)

• 700

• 350

• 800

• 550

The firm would like to raise 100 in capital by issuing new shares. Based on your earlier expected pre-money value, how much ownership will the owner need to give up to raise the 100? (Note: share required = capital raised / post-money value, where post-money value = pre-money value + capital raised))

• 12.5%

• 25%

• 14.3%

• 8.3%

If the owner knows for certain that his firm is good (i.e. the pre-money value is 1,100), what is the fair share that he should give up in exchange for the capital?

• 8.3%

• 12.5%

• 25%

• 14.3%

If the owner knows for certain that his firm is good (i.e. the pre-money value is 1,100), what is the value of the share of equity (based on your answer in question 2) that he actually gave up?

• 150

• 100

• 50

• 0

If he is raising money in order to invest in a project with NPV of 40, what would be the rational decision for him to do in this situation?

• Do not raise fund as the "loss" from fundraising is greater than the "gain" from investing.
• Raise fund as the NPV of the project is positive.

If the uncertainty about pre-money value is very high, which of the following statements is LEAST likely to happen?

• The firm will issue equity in more transparent markets (e.g. international stock markets).

• The firm will accumulate cash instead of raising external capital.

• The firm will invest less than its preferred plan.

• The firm will communicate more with investors to reduce uncertainty.

In reality, investors also take the fact that firms may actually be a lemon and sell overpriced stocks into account. Based on the your answers in earlier parts and this fact, what do you expect to happen when firms issue new equity?

• Stock prices tend to decrease.
• Stock prices tend to increase.
• Stock prices tend to stay the same.

If the firm instead raises capital using debt, which of the following statements is incorrect?

• Debt is cheaper than equity because cost of debt is lower than cost of equity.

• Financing is "less expensive" since debt is less sensitive to information asymmetry.

• If the firm is profitable, it will benefit from lower tax payment.

• The more debt the firm uses, the more likely it will be bankrupt.