1. Torrence Publishers is considering a recapitalization plan. It is currently 100% equity financed but under the plan it would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?
a) ROE would decline
b) ROA would increase
c) Earnings per share would decline
d) Cost of equity would increase
2. If a 1X liquidation preference is included in the term sheet the Venture Capitalist will never be able to realize a gain on its investment but will be protected from a loss.
TRUE OR FALSE
3. A typical exclusivity clause in a term sheet will prevent the founders from seeking capital from another firm for two years once the term sheet has been signed.
TRUE OR FALSE
4. Baldwin plant has a capacity of 4,100,000 and an automation level of 4.5. Last year they produced 3,875,401 units of Baker - producing 2,475,401 and outsourcing 1,400,000 units.
Which of the following would help Baldwin minimize capital spending this year?
a. Purchase 2,400,000 units of capacity
b. Raise Automation to 7.0
c. Outsource 1,900,000 units of capacity
d. Purchase 1,900,000 units of capacity