DEVRY FIN 516 Week 8 Final Exam Guide
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FIN 516 Week 8 Final Exam Guide
Question 1.1. (TCO B) Which of the following statements concerning the MM
extension with growth is not correct?
(a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant tax
shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of
equity under MM’s original (with tax) assumptions.
(d) For a given D/S, the WACC is greater than the WACC under MM’s original (with
tax) assumptions.
(e) The total value of the firm is independent of the amount of debt it uses.
Question 2.2. (TCO D) Which of the following statements is most correct?
(a) In a private placement, securities are sold to private (individual) investors rather
than to institutions.
(b) Private placements occur most frequently with stocks, but bonds can also be sold
in a private placement.
(c) Private placements are convenient for issuers, but the convenience is offset by
higher flotation costs.
(d) The SEC requires that all private placements be handled by a registered
investment banker.
(e) Private placements can generally bring in funds faster than is the case with public
offerings. (Points : 20)
Question 3.3. (TCO E) Buster’s Beverages is negotiating a lease on a new piece of
equipment that would cost $100,000 if purchased. The equipment falls into the
MACRS 3-year class, and it would be used for 3 years and then sold, because the firm
plans to move to a new facility at that time. The estimated value of the equipment
after 3 years is $30,000. If the borrow and purchase option is used, the cash flows
would be the following: (Year 1) -2,400; (Year 2) -3,800; (Year 3) -1,400; (Year 4) 79,600; all of these cash outflows...