1. Assume there are no corporate taxes and that the firm's WACC is unaffected by its capital structure. Which of the following is true?
A. an optimal capital structure for the firm exists
B. the cost of equity increases as the firm's leverage increases
C. the greater the financial leverage, the more valuable is the firm
D. The cost of equity is independent of its capital structure
2. SOSU&Me Inc. bonds are selling at $1,132, with 15 years to maturity; it makes an annual coupon payment at 8%. 5 years after the issue, the market interest rate declined and the corporation decided to call the bond at $1,080. The face value of the bond is $1,000. What is the Yield to Call on the bonds?
A. 7.01
B. 6.73
C. 5.87
D. 7.27%
3. Baseline corporation pays no taxes. the firm generates $2 million in operating income and pays $500,000 in interest expense each year. the weighted average cost of capital is 10%. What is Baseline's market value?
A. $15 million
B. $20 million
C. $25 million
D. Insufficient information not provided
4. You just paid $5 for a 3 month European style put option on a stock currently at $47 with a strike price of $50. The stock's next dividend will be $1 in 2 months' time. Which of the below statements is NOT correct?
A. You have the right to sell the underlying stock in 3 months’ time for a price of $50 if you want
B. If the dividend were unexpectedly cancelled because the firm decided to re-invest its cash rather than pay it out, then the option price would suddenly rise
C. If the stock price is $49 in 3 months then you would exercise the option and reap the $4 loss and $1 payoff at maturity
D. If the stock price is $51 in 3 months then you wouldn’t exercise. Your loss would be $5 and payoff $0
E. If the stock price is $57 in 3 months then the option would be ‘out of the money’ and shouldn’t be exercised.