FIN/540 Week 4 Homework Problems – Strayer NEW
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Homework Problems Chapter 22 and 23
1. Which of the following statements is most CORRECT?
a. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
b. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
c. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what’s probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.
d. Operating economies are never a motive for mergers.
e. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
2. Which of the following statements is most CORRECT?
a. Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm’s capital structure, it will not affect its overall required rate of return.
b. The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.
c. In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
d. The primary rationale for most operating mergers is synergy.
e. The acquiring firm’s required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.
3. Which of the following statements about valuing a firm using the APV approach is most CORRECT?
a. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
b. The horizon value is calculated by discounting the expected earnings at the WACC.
c. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
d. The horizon value must always be more than 20 years in the future.
e. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.
4. Which of the following statements about valuing a firm using the APV approach is most CORRECT?
a. The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
b. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.
c. The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
d. The APV approach stands for the accounting pre-valuation approach.
e. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
5. Which of the following statements is most CORRECT?
a. A defensive merger is one where the firm’s managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
b. Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
c. Cash payments are used in takeovers but never in mergers.
d. Managers often are fired in takeovers, but never in mergers.
e. If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.
1. Which of the following are NOT ways risk management can be used to increase the value of a firm?
a. Risk management can help a firm maintain its optimal capital budget.
b. Risk management can reduce the expected costs of financial distress.
c. Risk management can help firms minimize taxes.
d. Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
e. Risk management can increase debt capacity.
2. Which of the following statements about interest rate and reinvestment rate risk is CORRECT?
a. Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested.
b. Interest rate price risk can be eliminated by holding zero coupon bonds.
c. Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
d. Interest rate risk can never be reduced.
e. Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.
3. A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?
a. The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
b. Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
c. A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
d. A company can swap fixed interest payments for floating interest payments.
e. A swap involves the exchange of cash payment obligations.
4. Which of the following statements is most CORRECT?
a. Futures contracts generally trade on an organized exchange and are marked to market daily.
b. Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
c. There are futures contracts for currencies but no forward contracts for currencies.
d. Futures contracts don’t have any margin requirements but forward contracts do.
e. One advantage of forward contracts is that they are default free.
5. A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?
a. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
b. Purchase principal only (PO) strips that decline in value whenever interest rates rise.
c. Enter into a short hedge where the bank agrees to sell interest rate futures.
d. Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.
e. Buying inverse floaters.