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Corporate Finance Essay

1213 words - 5 pages

Eksamen 2009 FAKTA!

10) Explain why the yield to maturity on a convertible bond is lower than the yield to maturity on an otherwise Identical bond without the conversion feature.

10) The option to convert the bond into stock is valuable and hence its price will be higher and therefore its yield lower.

11) What is the meaning of the relationship
rWACC=rU = rA,
under perfect capital market assumptions?
Please explain

11) With perfect capital markets, a firm s WACC is independent of its capital structure and is equal to its equity cost of capital if it is unlevered, which matches the cost of capital of its assets. A graphical illustration demonstrating this argument would be nice ...view middle of the document...

D) The holder of a callable bond faces reinvestment risk precisely when it hurts: when market
rates are lower than the coupon rate she is currently receiving.

A) The stronger the covenants in the bond contract, the less likely the issuer will default on the
bond, and so the lower the interest rate investors will require to buy the bond.
B) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions
that may undercut its ability to repay the bonds.
C) Bond agreements often contain covenants that restrict the ability of management to pay
dividends.

21) The idea that managers who perceive the firm s equity is under-priced will have a preference to
fund investment using retained earnings, or debt, rather than equity is known as the
pecking order hypothesis.

22) The idea that claims in one’s self-interest are credible only if they are supported by actions that
would be too costly to take if the claims were untrue is known as the
A) credibility principle

A) In general, as long as the firm sells the new shares of equity at a fair price, there will be no
gain or loss to shareholders associated with the equity issue itself.
C) The money taken in by the firm as a result of the share issue exactly offsets the dilution of the
shares.
D) Most analysts prefer to use performance measures and valuation multiples that are based on
the firm’s earnings before interest has been deducted

Non dividend:
A) An American option with a later exercise date cannot be worth less than an otherwise
identical American option, with an earlier exercise date.
B) An American put option cannot be worth less than its intrinsic value.
D) A European put option can be worth less than its intrinsic value

B) To determine a project s cost of capital we need to estimate its beta.
C) A common assumption is that the project has the same risk as the firm.
D) The Capital Asset Pricing Model is the most important method for estimating the cost of
capital that is used in practice

Suppose that in the coming year, you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9, and Merck s stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the markets expected return is 12%.

38) Which stock has the highest total risk?
B) Exxon-Mobil since it has a higher volatility

A) When stocks are perfectly positively correlated, the...

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