Font size
WorksheetsFinance
Total questions: 84
Worksheet time: 1hrs 24mins
The Enterprise value is obtained:
subtracting the net debt from the fixed assets
dividing the FCF by the opportunity cost of capital
adding the working capital to the value of equity
adding the working capital to the net debt
According to the Modigliani and Miller's first proposition (with no taxes):
the firm value is equal to the market value of the total cash flows generated by its assets
the firm value is determined by the proportions of debt and equity securities issued to buy the assets
as leverage increases, the value of the firm decreases proportionally
as leverage increases, the value of the firm always grows proportionally
Which of the following sentences is wrong:
a convertible bond is like a traditional bond except that it also gives the holder the right to exchange it for one or more shares of the issuing company during a conversion period set in advance
warrants can be separated into distinct securities while a convertible cannot
the exercise of warrants does not guarantee an additional cash inflows to the company
in a convertible bond the band value provides a floor to the price of the security
According to the Pecking order theory:
internal funds don't require private information release
profitable firms use more debt
there is a target debt/equity ratio
companies don't like financial slack
Alfa is a company operating in the food industry, and at the end of 2019 was financed only with debt and equity. In 2020, Alfa issued a convertible bond. Supposing that the cost of debt and cost of equity remain equal after the convertible bond emission, the WACC will be:
higher than the WACC pre convertible bond emission
lower than the WACC pre convertible bond emission
the same
equal to the cost of equity
Compute the enterprise value for company Alfa considering the following data: EV = Free cash flow / rA
- working capital: 500,
- fixed assets: 800;
- net debt: 350;
- equity: 950,
1300
1750
the calculation is not possible with the provided data
850
Compute the conversion price of a convertible bond using the following data:
- 7 year callable convertible bond;
- coupon: 4%;
- par value: 2,000;
- straight debt issue would require a 5% coupon;
- call protection: 4 years;
- call price: 2,155;
- Pe: 30;
- De: 1.5;
- g: 5%;
- conversion ratio: 52 shares;
- tax rate: 28%.
about 41.35
about 38.46
about 31.50
about 155
As seen in the Diageo case, the weighted average volatility of the company ROA is lower than the volatility of the ROA of each of the sectors in which the company operates, because:
the company operates in emerging markets only
the company has a lower working capital respect to the competitors
the sectors in which the company operates are not correlated and this difference is due to the diversification effect
none of the above
Compute the beta unlevered of a company using the following data:
- beta equity: 1.14;
- debt: 32,340,000;
- market capitalization: 190,800,000;
- fixed costs: 11,989,000;
- variable costs: 14,340,000.
about 0.17
about 0.97
about 1.14
about 1.10
According to the Modigliani and Miller's second proposition with no taxes leverage increases the expected stream of earnings per share but not the share price:
Modigliani and Miller's second proposition states that leverage increases the expected revenues not the expected earnings per share
because the change in the expected earnings stream is exactly offset by a change in the rate at which the earnings are discounted
because increasing debt decrease the magnitude of depreciation
because increasing debt increase the magnitude of EBITDA
Hybrid securities:
Are characterized by lower remuneration than plain vanilla debt
Have limited (or any) guarantees
Cannot be issued by levered companies
Have a positive impact on working capital and negative impact on EBITDA margin
Delta is a firm operating in the food industry. Consider the impact of the issuance of 128 in new debt, at a 4% interest rate. Which of the following statements is correct:
if the company had issued 128 of equity rather than debt, net income would have been lower because dividends are higher than interest payments
the NPV of the 128 debt issuance is likely to be negative because it reduces the company's net income
if markets are efficient, the NPVs of both debt and equity issuance should be close to zero
if the interest rate increases to 5%, the company should no longer issue debt because debt became more expensive
Which of the following options is true:
because interest payments are tax deductible, a company's net income increases following the issuance of debt
because interest payments are tax deductible, a company's operating profits after taxes increases following the issuance of debt
because debt investors must pay taxes on interest payments, companies have no incentives to issue debt in order to reduce taxes
interest payments are a cost to the company and thus the company becomes less profitable after the issuance of new debt
Consider a bond that has a yield-to-maturity of 4%, and a credit rating of BBB. Assume that the probability that the company will default on the bond during next year is 0.5%, and that investors recovery rate upon default is 40%. Suppose that the probability of default on this bond increases to 0.75% a year. Which of the following options is correct:
the yield-to-maturity decreases
the recovery rate will probably decrease since the bonds became riskier
the bond's expected return will go down because the risk of default is larger
the yield-to-maturity will increase to compensate investors for the greater risk of default
The Enterprise value is obtained by:
a) subtracting the net debt from the fixed assets
b) dividing the FCF by the opportunity cost of capital
c) adding the working capital to the value of equity
d) adding the working capital to the net debt
According to the Modigliani and Miller's first proposition (with no taxes):
the firm value is equal to the market value of the total cash flows generated by its assets
the firm value is determined by the proportions of debt and equity securities issued to buy the assets
as leverage increases, the value of the firm decreases proportionally
as leverage increases, the value of the firm always grows proportionally
Which of the following sentences is wrong:
a convertible bond is like a traditional bond except that it also gives the holder the right to exchange it for one or more shares of the issuing company during a conversion period set in advance
warrants can be separated into distinct securities while a convertible cannot
the exercise of warrants does not guarantee an additional cash inflows to the company
in a convertible bond the band value provides a floor to the price of the security
According to the Pecking order theory
internal funds don't require private information release
profitable firms use more debt
there is a target debt/equity ratio
companies don't like financial slack
Alfa is a company operating in the food industry, and at the end of 2019 was financed only with debt and equity. In 2020, Alfa issued a convertible bond. Supposing that the cost of debt and cost of equity remain equal after the convertible bond emission, the WACC will be:
higher than the WACC pre convertible bond emission
lower than the WACC pre convertible bond emission
the same
equal to the cost of equity
Compute the conversion price of a convertible bond using the following data:
- 7 year callable convertible bond;
- coupon: 4%;
- par value: 2,000;
- straight debt issue would require a 5% coupon;
- call protection: 4 years;
- call price: 2,155;
- Pe: 30;
- De: 1.5;
- g: 5%;
- conversion ratio: 52 shares;
- tax rate: 28%.
a) about 41.35
b) about 38.46
c) about 31.50
d) about 155
Compute the enterprise value for company Alfa considering the following data: EV = Free cash flow / rA - working capital: 500,
- fixed assets: 800;
- net debt: 350;
- equity: 950,
1.300
1,750
the calculation is not possible with the provided data
850
As seen in the Diageo case, the weighted average volatility of the company ROA is lower than the volatility of the ROA of each of the sectors in which the company operates, because:
the company operates in emerging markets only
the company has a lower working capital respect to the competitors
the sectors in which the company operates are not correlated and this difference is due to the diversification effect
none of the above
Compute the beta unlevered of a company using the following data:
- beta equity: 1.14;
- debt: 32,340,000;
- market capitalization: 190,800,000;
- fixed costs: 11,989,000;
- variable costs: 14,340,000.
about 0.17
about 0.97
about 1.14
about 1.10
According to the Modigliani and Miller's second proposition with no taxes leverage increases the expected stream of earnings per share but not the share price:
Modigliani and Miller's second proposition states that leverage increases the expected revenues not the expected earnings per share
because the change in the expected earnings stream is exactly offset by a change in the rate at which the earnings are discounted
because increasing debt decrease the magnitude of depreciation
because increasing debt increase the magnitude of EBITDA
Hybrid securities:
Are characterized by lower remuneration than plain vanilla debt
Have limited (or any) guarantees
Cannot be issued by levered companies
Have a positive impact on working capital and negative impact on EBITDA margin
Delta is a firm operating in the food industry. Consider the impact of the issuance of 128 in new debt, at a 4% interest rate. Which of the following statements is correct:
(a) if the company had issued 128 of equity rather than debt, net income would have been lower because dividends are higher than interest payments
b) the NPV of the 128 debt issuance is likely to be negative because it reduces the company's net income
c) if markets are efficient, the NPVs of both debt and equity issuance should be close to zero
d) if the interest rate increases to 5%, the company should no longer issue debt because debt became more expensive
Which of the following options is true:
because interest payments are tax deductible, a company's net income increases following the issuance of debt
because interest payments are tax deductible, a company's operating profits after taxes increases following the issuance of debt
because debt investors must pay taxes on interest payments, companies have no incentives to issue debt in order to reduce taxes
interest payments are a cost to the company and thus the company becomes less profitable after the issuance of new debt
Consider a bond that has a yield-to-maturity of 4%, and a credit rating of BBB. Assume that the probability that the company will default on the bond during next year is 0.5%, and that investors recovery rate upon default is 40%. Suppose that the probability of default on this bond increases to 0.75% a year. Which of the following options is correct:
the yield-to-maturity decreases
the recovery rate will probably decrease since the bonds became riskier
the bond's expected return will go down because the risk of default is larger
the yield-to-maturity will increase to compensate investors for the greater risk of default
Consider a company that has a stock price of $ 60 and 250M shares outstanding. Suppose that the company repurchases 10M shares at the current market price. The correct option is:
the stock price will increase because there are fewer shares outstanding
the stock price will probably increase because the market tends to respond positively to stock repurchases
the stock price will decrease because the company is spending 600 M in cash to do the repurchase
the stock price will increase because earnings-per-share are likely to go up
Which of the following options is correct:
repurchases are less likely tax-efficient than dividends, and the most tax-efficient policy is not to payout any cash at all
dividends have become a negligible component of payout for US companies
dividends are the most efficient payout mechanism to use if the company believes that its stock price is undervalued
it is difficult to explain why firms pay dividends because most of the benefits of a dividend can be replicated with a stock repurchase of similar magnitude
Consider a bond that has a yield-to-maturity of 4%, and a credit rating of BBB. Assume that the probability that the company will default on the bond during next year is 0.5%, and that investors recovery rate upon default is 40%. Investor's expected return when investing in this BBB bond is:
about 3.7%
about 3.0%
about 4.0%
about 3.5%
The enterprise value (EV):
Is obtained as the sum of fixed assets and shareholders’ equity
Represents the market value of firm’s debt net of cash
Is obtained as the sum of working capital and net debt
Is obtained dividing the free cash flow (FCF) by the opportunity cost of capital (rA)
Compute the relative tax advantage of debt for a firm using the following data:
- Тре: 20%
-Tc 30%
-Tp 15%
The calculation is impossible with the data provided
Around 1.03
Around 1.52
Around 0.57
According to the II° proposition of Modigliani and Miller (with no corporate taxes):
leverage decreases the expected stream of earnings per share but not the share price
leverage increases the share price but not the expected stream of earnings per share
leverage decreases the share price but not the expected stream of earnings per share
leverage increases the expected stream of earnings per share but not the share price
With perfect capital markets:
the total value of a firm's securities is equal to the market value of the total cash flows generated by its assets
the total value of a firm's securities is affected by its choice of capital structure
financial transactions add value
financial transactions destroy value
If operating income is constant:
anything that increases the value of the firm increases the weighted-average cost of capital
anything that increases the value of the firm reduces the weighted-average cost of capital
anything that increases the value of the firm reduces the working capital
anything that increases the value of the firm increases the working capital
When the company has no debt at all
the weighted average cost of capital is equal to the return on assets
the weighted average cost of capital is higher than the return on assets
the weighted average cost of capital is lower than the return on assets
the weighted average cost of capital is equal to zero
Compute the expected return to equity for a levered firm using the following data:
⁃ Ra: 8.2%;
⁃ Rd: 3.6%;
⁃ debt: 12,536,000;
⁃ equity: 13,210,000.
about 19.4%
about 13%
about 3.8%
about 12.6%
Alfa is a firm operating in the food industry. At the end of 2022, the firm had a beta equity equal to 1.1, debt for $ 1.2 million and equity for $ 3 million. The unlevered beta is equal to:
about 0.79
about 1.54
about 1.83
about 2.75
Which of the following alternatives is the slowest if a company wants to change the D/E ratio
recapitalization
sale and lease back
different mix of financing for new investments
divestitures
By matching the duration of assets with the duration of liabilities, the default risk is also reduced and the company
will have a lower cost of debt, a lower WACC and a higher value
can afford having a lower amount of debt and a lower desired debt ratio
both of the previous options are correct
none of the above options are correct
Compute the value a levered firm using the following data:
⁃ value of firm if all-equity financed: 24,750,000;
⁃ debt: 5,998,000;
⁃ Tc: 30%;
⁃ PV of cost of financial distress: 2,970,000
Assume that the firm's debt is fixed and perpetual and ro is the appropriate discount rate to compute the tax shield.
1,799,400
23,579,400
27,778,000
19,980,600
Compute the WACC of Alta, a firm operating in the food industry financed with debt, equity and convertible bonds using the following data:
⁃ debt: 1,987,000;
⁃ equity: 2,456,000
⁃ convertible bonds: 500,000;
⁃ cost of debt: 2.59;
⁃ tax rate: 35%;
⁃ cost of equity: 996;
⁃ cost of convertible bonds after tax: 4%.
about 5.1%
about 5.5%
about 4.7%
none of the above
In case of asymmetric information between managers and shareholders, dividend policy may be important:
because we are reasoning in a risk neutral universe
because shareholders fear managers won't choose the best solutions for the company and they want their money back to decide whether to stay or go
because with dividends shareholders can afford buying the right information to assess the manager's strategy
high dividends avoid equity share buybacks which may not be successful if shareholders are under informed
The main characteristic of any dividend policy should be:
regularity over time of the dividend per share (in euros)
consistency with the shareholders' expectation about the equity rate of return
proportionality to the net earnings
inverse proportionality to the financing need of the firm
Buying back shares may be preferable to paying out dividends as:
bond holders prefer a share buyback as it increases the guarantee they benefit from the issuing company
with a share buyback there is no drop in the share price
dividend policy may induce a change in the voting rights of the shareholders
any high pay out rate makes equity shares more desirable and hence increases the value of any call option.
In case the firm is not performing very well, dividend policy is important because
shareholders want to alleviate the burden the company has to bear, decrease the dividends and let the money within the company
shareholders fear the firm has no interesting project they would like to invest in, and they want their money back to invest in other projects
shareholders received high dividends the previous years and they can bear a low dividend rate for one year
as dividends are the shareholder's remuneration, they don't want to damage the company social climate and agree to decrease the dividend rate
Should a firm issue new shares when the current shares are overvalued or under-valued?
over-valued, because a well-performing firm will easily draw new investors
under-valued, because it won't cost much to the firm
over-valued, because the dilution effect will be low
under-valued because it will have a dilution effect
Consider a firm with 100,000 existing shares and who wants to issue 1 new share for 4 existing ones. Just before the issue, the market price of shares is 50 € and the subscription price of the new shares is 45 €. What is the theoretical price of the share after the issue?
€ 48.5
€ 47
€ 49
€ 51
Following an issue of new shares, the apparent dilution coefficient:
is equal to the actual dilution coefficient
depends on the number of new shares compared to the whole number of shares after the issue
depends on the weight of the majority shareholder within the sharehoders' meeting
depends on the dispersion of equity shares among shareholders
The convexity of a convertible bond:
stems from the holder option to choose between the bond part of the convertible and the equity part
can either be positive or negative according to the stock value
is a characteristic of a zero-coupon convertible bond
can either be positive or negative according to the conversion ratio
A soft call option:
gives the issuer the option to call back the convertible bond if its value is higher than a specific barrier
gives the holder of the convertible bond such a right
is used only for zero-coupon convertible bond
is only present in contracts with a low conversion ratio
As a convertible bond holder does not receive any dividend:
he/she is not concerned with the pay-out ratio
is concerned with the pay-out ratio as far as the coupon rate is low
is concerned with the pay-out ratio depending on the conversion ratio
is concerned with the pay-out ratio as the equity price may move with the paying-out policy of the firm
According to the trade- off theory:
The value of levered firm is equal to the value of unlevered firm
At moderate debt levels the present value of cost of financial … is higher than tax advantages
The theoretical optimum is reached when firm is financed 50% debt and 50% equity
None of the above
Consider two companies that are perfectly equivalent except for the way they are financed: company A is financed with debt and equity only, while company B is financed with debt, equity and convertible bonds. According to the Modigliani and Miller's theory.
Firm B has a working capital higher than firm A
The two companies have different WACC
Firm A has intangible assets lower than firm B
The two companies have the same WACC
Compute the value of firm Gamma (a levered firm) considering that:
- value of firm (if all equity financed): 1,000; -
- present value of tax shield: 150;-
- fixed assets: 800;
- present value of costs of financial distress: 200,+
1,350
950
650
None of the above
According to the Modigliani and Miller's second proportion with no taxes leverage increases the expected stream of earnings per share but not the share price
because increasing debt decrease the magnitude of depreciation
because the change in the expected earnings stream is exactly offset by a change in the rate at which the earnings are discounted
Modigliani and Miller's second proposition states that leverage increases the expected revenues not the expected earnings per share
because increasing debt increase the magnitude of EBITDA
If we have two streams of cash flow A and B (and there are no synergies)
The present value of A+B is equal to the PV of A multiplied the PV of B
The present value of A+B is equal to the PV of A divided the PV of B
The present value of A+B is equal to the PV of A minus the PV of B
The present value of A+B is equal to the PV of A plus the PV of B
According to the principle of conservation (Modigliani and Miller's first proposition):
the choices of long-term versus short term debt should aftect the overall value of the firm
the choices of senior versus subordinated debt should affect the overall value of the firm
the choices of convertible versus nonconvertible debt should affect on the overall value of the firm
none of the above
Compute the expected return to equity for company (a levered firm) using the following data:
- гa: 8%;
- trade payables: 255;
-rd: 3%;
- debt: 750;
- fixed assets: 1,000;
- equity: 500.
24.50%
15.50%
11.33%
none of the above
The sentence “the market value of any firm is indipendent of its capital structure” refers to:
The agency theory
The modigliani and miller’s first proposition
The pecking order theory
The trade-off theory
Compute the enterprise value for company Alfa considering the following data
- working capital: 500,
- fixed assets: 800,
- net debt: 350;
- equity: 950.
1.300
850
the calculation is not possible with the data provided
1750
According to the conservation of value principle
with perfect capital markets, financial transactions neither add or destroy value, but instead represent a repackaging of risk
the higher the proportion of debt in the firms' capital structure the higher the WACC will be
with perfect capital markets, financial transactions add or destroy value
with perfect capital markets, financial transactions do not represent a repackaging of risk
According to the second proposition of Modigliani and Miller (with no taxes):
there is a trade-off between the tax benefits and the costs of distress could determine optimal capital structure
the expected rate of return on the common stock of a levered firm decreases in proportion to the debt-equity ratio (D/E), expressed in market values
the expected rate of return on the common stock of a levered firm increases in proportion to the debt-equity ratio (D/E), expressed in market values
trade-off between the working capital and the fixed assets could determine optimal capital structure
According to the pecking order theory:
there is a target debt/equity ratio
firms prefer to issue equity rather than debt if internal finance is efficient
profitable firms use less debt
internal funds require private information release
According to the first proposition of Modigliani and Miller (with no taxes), a firm's choices of using long-term versus short-term, senior versus subordinated, and convertible versus nonconvertible debt?'
it should have an effect on the overall value of the firm by increasing the value of the firm as the percentage of senior debt increases
it should have an effect on the overall value of the firm by increasing the value of the firm as the percentage of convertible debt increases
it should have an effect on the overall value of the firm by increasing the value of the firm as the percentage of long-term debt increases
should have no effect on the overall value of the firm
Removing the assumption of the absence of corporate taxes from the second proposition of Modigliani and Miller:
the discount rate (now called WACC) remains the same
it is impossible to remove the assumption of the absence of corporate taxes from the second proposition of Modigliani and Miller
the discount rate (now called WACC) decreases
the discount rate (now called WACC) increases
Which of the following sentences is correct:
the information asymmetry does not affect the choice between internal and external financing and between new issues of debt and equity securities
the pecking order theory suggests that firms will use debt first, then equity and finally internal funds
firms with higher market-to-book ratios have higher debt ratios
according to the trade-off theory the theoretical optimum is reached when the present value of tax savings due to further borrowing is just offset by increases in the present value of costs of distress
According to professional experts the optimal leverage (and the minimum WACC) is around a:
BBB company's rating
AAA company's rating
AA company's rating
BB company's rating
Compute the WACC using the following data:
rE: 11%;
rD: 5%;
tax rate: 30%;
debt: 3,500,000;
equity: 4,210,000.
about 7.60%
about 8.28%
about 2.60%
about 6.12%
Alfa is a firm operating in the food sector. In 2021, Alfa had a return on asset of 8%, a return on debt of 3% and a D/E ratio of 40%. In 2022, the expected return on assets and debt is the same as in the previous year but the D/E ratio rises to 60%. The expected return on equity in 2022, compared to 2021, is expected to be:
lower
it is impossible to provide an answer with the data provided
higher
the same
A company can reduce the agency costs:
reducing the degree of concentration of debt
matching cash inflows with cash outflows for the debt service
increasing the maturity of the debt
avoiding contractual provisions that discipline the role of management and major shareholders
Share buyback is preferred in the United States to dividend distribution:
because it allows a modification of the voting right percentages of the different shareholders
because it increases the gearing of the company and the rate of return of equity
because it gives the opportunity to each shareholder to choose the quantity of cash he will receive (a specific payout ratio for each shareholder)
all previous answers are correct
A convertible bond convexity refers to:
the presence of a floor which is equal to the face value of the convertible
the shape of the curve showing the value of the convertible which is turned downwards
a low discount rate due to the presence of a conversion option
the presence of a floor which is equal to the value of the bond part of the convertible
Compared to a classical bond provided with the same financial characteristics (but without any conversion possibility), a convertible bond has:
the same sensitivity
a higher or lower sensitivity according to the level of the bond part return
a higher sensitivity
a lower sensitivity to any interest rate variation
Choosing a high payout ratio (dividend distribution rate):
increases the gearing as it decreases the equity value
decreases the gearing as equities appear as a more interesting investment
increases or decreases the gearing according to the level of the payout ratio compared to the expected rate of return of shareholders
has no effect on the gearing of the company (an irrelevant question)
The value of a convertible bond is:
positive when the conversion ratio (number of equity shares you receive when you convert 1 bond) is higher than 1
always lower than the conversion value as the return of the bond part of the convertible is low
either positive or negative according to the market value of the convertible
always higher than the conversion value as the convertible bond benefits from the upside of the share and not its downside
Concerning dividend distribution, a convertible bond holder:
is worried about such a distribution as it decreases the stock value
does not mind about the payout ratio as he does receive any dividend
is worried about such a distribution if the level of its "coupon" is low compared to the level of dividends
does not mind about the payout ratio as the dividend policy is not a relevant question (Modigliani-Miller theorem)
When a firm goes public:
a. the payout ratio should be kept quite at the same level
b. it should increase its payout ratio due to signaling questions
c. it should increase its payout ratio if the income tax rate of the new shareholders is low compared to the tax rate on capital gains
d. it should increase its payout ratio for both reasons b) and c)
A company should engage in an issue of convertible bonds:
when the rate of return on its debt is high
when the volatility of its stock is high
when both its stock volatility and its debt cost are high
when its stock price is high
Consider a firm with 100,000 existing shares who wants to issue 1 new share for four existing ones. Just before the issue, the market price of shares is 135 € and the subscription price of the new shares is 99 €. What is the theoretical price of the share after the issue:
€128
€213
€142
€88
When a firm retains part of its net benefits and does not choose a payout ratio of 100%, the cost of these retained earnings:
is equal to the cost of debt, as it is money which does not belong to the firm
is equal to the cost of equity
is equal to the weighted average cost of capital
is nil
In a well-functioning market, when two investments offer the same payoff, what should be true regarding their capital structure?
The capital structure should be different for each investment.
The capital structure should be the same for both investments.
The capital structure is irrelevant; only the payoff matters.
The capital structure depends on investor preferences.
Does a dividend decrease the conversion probability of a convertible bond ?
re ?
-ra=7.1
-rd=2.9
-D= 4.200.000
-Sales=5.500.000
-EBITDA=1.450.000
-E=4.650.000
9.02
10.89
3.15
18.78
