Accounting

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2) Started: Nov 11 at 15:00

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3 ptsQuestion 1

More than one of the other statements are correct.

Removing the poor outcomes without affecting positive outcomes will decrease expected returns.

Risk management should not matter in perfect capital markets.

None of the other statements are correct.

Managers will not reduce the firm’s risk to reduce their own career risk.

Which of the following statements accurately describe risk management?

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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3 ptsQuestion 2

More than one of the other statements are correct.

Takeover activities usually occur in waves.

None of the other statements are correct.

One disadvantage of cash offers is that it can makes the offer more likely to be rejected by the target firm’s shareholders.

Takeovers that result in market monopolies can be subject to approval be government regulators.

Which of the following statements accurately describe takeovers?

3 ptsQuestion 3

In a spin-off, the parent firm keeps significant ownership of the spun-off firm.

In a spin-off, the shares of the spun-off firm are distributed to existing shareholders.

More than one of the other statements are correct.

A spin-off is the simplest way to make a firm more focused.

None of the other statements are correct.

Which of the following statements accurately describe spin-offs?

3 ptsQuestion 4

High dividend payout policy can increase the potential conflict between managers and shareholders.

Which of the following statements accurately describe dividend policy?

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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Increasing dividends usually signal that managers believe the firm has poor cash flow prospects in the future.

None of the other statements are correct.

More than one of the other statements are correct.

Managers are usually willing to increase dividends even if the increase in earnings is likely to be unsustainable.

3 ptsQuestion 5

Selling the right to buy an underlying asset is referred to as a long put.

More than one of the other statements are correct.

None of the other statements are correct.

Buying the right to sell an underlying asset is referred to as a short call.

Buying the right to buy an underlying asset is referred to as a long call.

Which of the following statements accurately describe option positions?

3 ptsQuestion 6

Vertical takeover

Conglomerate takeover

Hostile takeover

Horizontal takeover

None of the others.

Pinder Ltd is an electronics, home, and whitegoods retailer. It recently completed a takeover of Value Co which sells home entertainment systems, small and large kitchen appliances including washing machines, refrigerators etc. This takeover can be best classified as a

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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3 ptsQuestion 7

It can eventually lead to a spin-off.

None of the other statements are correct.

The parent company maintains a significant ownership in the new entity.

More than one of the other statements are correct.

The parent company does not receive cash from the shares sold in the new entity.

Which of the following statements accurately describe equity carve-outs?

3 ptsQuestion 8

None of the other statements are correct.

More than one of the other statements are correct.

It is designed to prevent double taxation.

It incentivizes firms to keep retain franking credits for future use.

It is a common taxation system throughout the world.

Which of the following statements accurately describe the imputation tax system?

3 ptsQuestion 9

Pinder Ltd operates under the classical tax system. Pinder Ltd has a taxable income of $3164 and its tax rate is 27%. Pinder Ltd pays all of its net income as dividends. If the average personal tax rate on dividend income is 47%, what is the total dividend income tax paid by Pinder Ltd’s shareholders? (round to the nearest two decimal places)

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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$869.48

None of the other answers.

$1085.57

$734.71

$922.66

3 ptsQuestion 10

$6.55

$6.73

$6.84

$6.50

None of the other answers.

Pinder Ltd has announced a cash offer to acquire Value Co. Pinder Ltd’s shares are trading at $15 and there are 2 million shares of outstanding. Value Co’s shares are trading at $5 and there are 1 million shares outstanding. Pinder Ltd estimates that the acquisition will incur integration costs of $250,000 per year for the first three years. Pinder Ltd expects to be able to reduce overlapping capital expenditures by $650,000 during the first five years of the acquisition. The required rate of return for Pinder Ltd is 10%. Assume cash flows occur at the end of each year. Based only on the information above, what is the maximum price Pinder Ltd can offer before destroying shareholder value? (round to the nearest two decimal places)

3 ptsQuestion 11

Pinder Ltd has announced a scrip(stock) offer to acquire Value Co. Pinder Ltd’s shares are trading at $17 and there are 3 million shares of outstanding. Value Co’s shares are trading at $4 and there are 1 million shares outstanding. Pinder Ltd estimates that the acquisition will incur integration costs of $250,000 per year for

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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0.55:1

0.43:1

0.49:1

0.52:1

None of the other answers.

the first three years. Pinder Ltd expects to be able to reduce overlapping capital expenditures by $750,000 during the first five years of the acquisition. The required rate of return for Pinder Ltd is 10%. Assume cash flows occur at the end of each year. Based only on the information above, what is the maximum exchange ratio that Pinder Ltd can offer before destroying shareholder value? (round to the nearest two decimal places)

3 ptsQuestion 12

None of the other answers.

$5.49

$5.31

$5.20

$5.08

Pinder Ltd operates in the world of Modigliani and Miller. Pinder Ltd’s EBIT is expected to be $151,112 and all earnings will be paid out as dividends. Pinder Ltd currently is unlevered and has 405,344 shares outstanding. Mary buys 5 shares of Pinder Ltd at $3 per share, but is unsatisfied with the expected rate of return on her investment in Pinder Ltd. If she can borrow at 5% and wants to achieve a rate of return of 15%, how much money should she borrow to buy additional shares in Pinder Ltd, based only on the information above? (round to the nearest two decimal places)

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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3 ptsQuestion 13

$-4.82

$-4.40

None of the other answers.

$-4.18

$-4.61

Prior to TD 2004/22, Pinder Ltd announces an off-market buyback to its shareholders at $15 per share. Of the $15, $10 was a fully franked dividend and the capital component was $5. The market price for Pinder Ltd is $20 per share. Susan owns one share in Pinder Ltd which she had bought 3 years ago at $10. Pinder Ltd’s tax rate is 25% and Susan’s personal tax rate is 43%. If Susan decides to participate in the buyback, what is her gain/loss relative to selling shares in the exchange at the market price of $20, based only on the information above? (round to the nearest two decimal places)

3 ptsQuestion 14

$50,633.02

$50,133.99

$49,133.02

Susan owns all the debt and equity that is issued by Pinder Ltd. Pinder Ltd has an EBIT of $504,341. Of that EBIT, Pinder Ltd pays interest expenses of $196,490 and distributes all net income as dividends. The corporate tax rate is 28%, and Susan’s personal income tax rate is 43%, applicable to both dividend and interest income. Susan currently lives under the classical tax system. Based only on the information above, how much more after-tax income would Susan have earned from interest and dividends under an imputation tax system? (round to the nearest two decimal places)

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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None of the other answers.

$49,633.23

3 ptsQuestion 15

12,763.10

None of the other answers.

12,562.94

12,662.49

12,463.03

Pinder Ltd is considering building a toy factory for $374,217. It is a five-year project, after which the disposal costs will cancel out the salvage value from the factory. During each of the five years, Pinder Ltd estimates sales volume to be 31,623 units, selling price to be $25, variable cost to be $8, and fixed costs to be $119,958. Pinder Ltd’s required rate of return is 10%. Pinder Ltd is concerned about a potential drop in sales volume impacting investment returns. Assume cash flows occur at the end of each year, except for initial cash flows. Based only on the information above, what does the sales volume need to drop to before NPV of the project becomes zero? (round to the nearest two decimal places)

3 ptsQuestion 16

Pinder Ltd wants to estimate the value of Value Co using a DCF analysis. Last year, Value Co’s revenues were $1,000. For the next five years, Pinder Ltd makes the following projects about Value Co. Value Co’s sales are expected to grow by $100 each year. Value Co’s EBIT margin is expected to remain constant at 40%. Value Co’s depreciation is expected to be 10% of sales each year. The capital expenditures are expected to be 15% of sales for the next three years then 10% thereafter. There are no expected changes in Value Co’s working capital. Value Co’s free cash flows after this five year projection period is expected to grow at 1% per annum in perpetuity. The corporate tax rate is 30%. The market value of

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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$5603.13

$4010.36

$7530.71

$9935.13

None of the above.

Value Co’s debt is $600 and the market value of Value Co’s equity is $3000. The cost of debt is 6%, the risk-free rate is 1%, the market risk premium is 10%, and the unlevered beta for comparable firms is 0.8. Based only on the information above, what is the equity value of Value Co, based on the DCF? (round to the nearest two decimal places)

3 ptsQuestion 17

10.69

None of the other answers.

9.64

10.16

8.64

Pinder Ltd is considering a merger with Value Co, where Pinder Ltd will issue 2 of its own shares for 5 shares of Value Co. The share price for Pinder Ltd is $34.78 and the share price for Value Co is $10.59. The price-to-earnings ratio for Pinder Ltd is 10.79 and the price-to-earnings ratio for Value Co is 5.18. The number of shares outstanding for Pinder Ltd is 482,260 and the number of shares outstanding for Value Co is 201,604. There are no operational synergies expected from the merger, but Pinder Ltd believes that the Value Co was undervalued by the market due the lack of investor relations management, and that once it is included as part of Pinder Ltd, that Value Co’s business would be valued 50% higher in terms of price or the price-to-earnings ratios. Based only on the information above, what is the expected price-to-earnings ratio of the combined firm if Pinder Ltd’s beliefs are correct? (round to the nearest two decimal places)

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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3 ptsQuestion 18

$2.15 million

$1.90 million

$2.32 million

$2.56 million

None of the other answers.

Pinder Ltd is considering building a solar power plant. The solar power plant will cost $10.3 million immediately, and will take 1 year to build. If there is high demand for electricity, the solar power plant will generate $5.0 million per year in perpetuity. If there is low demand for electricity, the solar power plant will generate $0.20 million per year in perpetuity. The probability of high demand is 69% and the probability of low demand is 31%. In order to incentivize solar power, the government is providing an offer for firms to sell their solar power plants to the government at a 10% discount to cost, exactly two years after the completion of the solar power plant. In other words, if the cost of building the solar power plant is $1, the government will offer to buy it at $0.9. There are no other options to sell the solar power plant other than to the government. The required rate of return for Pinder Ltd is 10%. Assume cash flows occur at the end of each year, except for initial cash flows. Based only on the information above, what is the value of the option to sell the solar power plant to the government, using the decision-tree method? (round to the nearest two decimal places)

3 ptsQuestion 19

Pinder Ltd is considering buying the patent rights to a recently developed drug to treat eczema for $29.5 million. There is only 2 years left on the life of the patent, after which Pinder Ltd would not be able to compete with generic drug manufacturers. In order to produce the drug, Pinder Ltd would need to spend $10.2 million each year to use production facilities owned by other firms, and each pill would cost Pinder Ltd $0.19 to make. Because Pinder Ltd will borrow existing production facilities from other firms, it can choose whether to produce the drug each year. Pinder Ltd is able to gauge demand for the drug at the start of each

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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$5.95 million

None of the other answers.

$6.66 million

$6.59 million

$6.17 million

year. If there is high demand, Pinder Ltd will be able to sell 10 million pills during the year and if there is low demand, Pinder Ltd will be able to sell 0.5 million pills during the year. In any year, if there is high demand for the drug, there will always continue to be high demand for drug during the remaining life of the patent. In any year, if there is low demand for the drug, the following year can have high demand or low demand. The probability that there will be high demand is 43% and the probability that there will be low demand is 57%. Due to government regulation, the price of the drug is fixed at $4.9 per pill, regardless of demand. The required rate of return for Pinder Ltd is 10%. Assume cash flows occur at the end of each year, except for initial cash flows. Based only on the information above, what is the present value of the option to delay production of the drug, using the decision- tree method? (round to the nearest two decimal places)

3 ptsQuestion 20

Pinder Ltd buys 402,504 barrels of crude oil each year to produce 303,852 barrels of refined oil products. Pinder Ltd has a price policy where Pinder Ltd’s refined oil products are priced at 200% of the crude oil price. Pinder Ltd has no problems selling all of its products as long as it keeps to that price policy. For example, if the price of crude oil is $18 per barrel, the price of Pinder Ltd’s refined oil products will be $36 per barrel. Last year, the price of crude oil was $40 per barrel, and all other costs for Pinder Ltd excluding the cost of purchasing crude oil, such as wages and maintenance costs, added up to a total of $1,000,000. The price for this year’s crude oil has yet to be determined, but Pinder Ltd expects crude oil prices to remain at $40 per barrel with 40% probability, fall to $30 per barrel with 30% probability, and rise to $50 per barrel with 30% probability. Additionally, the other costs (which was $1,000,000 last year) is expected to rise by 10% this year, regardless of crude oil prices. Pinder can go long on call or put options with the crude oil as the underlying asset and an exercise price of $40 that expire this year, when the profits for the firm are generated. The price of the call/put options are

11/11/21, 12:03 PM Quiz: Exam: Corporate Financial Decision Making (FNCE20005_2021_SM2)

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Saved at 12:02

Long 100,353.96 call options

Long 90,353.38 put options

None of the other answers.

Long 90,353.38 call options

Long 100,353.96 put options

$0.10 per option, where one option gives the holder the right to buy/sell one barrel of crude oil. Pinder Ltd wants to take the smallest option position possible so that its net income for this year does not fall below $6,000,000. Assume that there are no taxes. Based only on the information above, which of the following option positions should Pinder Ltd take? (round to the nearest two decimal places)

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