# Capital Structure, Exchange Rate

? The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price of $27/share, calculate the value of a right.

A) $3/right

B) $1/right

C) $2/right

D) None of the above

? Company X has 100 shares outstanding. It earns $1,000 per year and expects repurchase its shares in the open market instead of paying dividends. Calculate the stock price at the end of year-1, if the required rate of return is 10%.

A) $110

B) $ 90

C) $100

D) none of the above

? If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of tax is different because:

A) Capital gains are actually taxed, while dividends are taxed on paper only

B) Dividends are taxed when distributed while capital gains are deferred until the stock is sold

C) Both dividends and capital gains are taxed every year

D) Both A and C

? Under what conditions would a policy of maximizing the value of the firm not be the same as a policy of maximizing shareholders' wealth?

A) If the issue of debt increases the probability of bankruptcy

B) If the firm issues debt for the first time

C) If an issue of debt affects the value of existing debt

D) If the beta of equity is positive

? For a levered firm,

A) as earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent

B) As EBIT increases, the EPS increases by a larger percent

C) As EBIT increases, the EPS decreases

D) None of the above

? Health and Wealth Company is financed entirely by common stock which is priced to offer a 15% expected return. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected return on the common stock after refinancing? (Ignore taxes.)

A) 24%

B) 18%

C) 15%

D) None of the above

? Health and Wealth Company is financed entirely by common stock which is priced to offer a 15% expected return. The common stock price is $40/share. The earnings per share is expected to be $6. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected value of earnings per share after refinancing? (Ignore taxes.)

A) $6.00

B) $7.20

C) $7.52

D) None of the above

? A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes its cost of equity capital with the new capital structure would be:

A) 8%

B) 16%

C) 13%

D) 10%

E) None of the above

? The equity beta of a levered firm is 1.2. The beta of debt is 0.2 The firm's market value debt to equity ratio is 0.6. What is the asset beta if the tax rate is zero?

A) 1.2

B) 0.2

C) 0.825

D) None of the above

? Assume the corporate tax rate is 50%. A firm has perpetual expected EBIT of $100. The firm has no debt in its capital structure. Its cost of equity is 10%. What would be the value of the firm if it issued $600 in perpetual debt?

A) $700

B) $800

C) $900

D) Insufficient information

E) None of the above

? Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34%

Personal tax rate on income from bonds: 30%

Personal tax rate on income from stocks: 30%

A) $0.66

B) $0.34

C) -$0.66

D) -$0.34

? The spot Yen/US$ exchange rate is 108.9 , and the spot US$/BP exchange rate is 1.4273. What is the spot Yen/BP exchange rate? (BP: British pound)

A) Yen 108.9/BP

B) Yen 155.433/BP

C) Yen 76.2979/BP

D) Yen 93.35/BP

? If the direct rate for Euro is US$0.858 and the direct rate for Canadian dollars (C$) is US$0.70, what must be the spot rate between C$/euro to prevent triangular arbitrage?

A) C$ 1.2257

B) C$ 0.70

C) C$ 1.5533

D) C$ 0.6006

? The direct rate exchange for euro is US$0.858. The indirect exchange rate for British pounds (BP) is BP0.70/US$. If there is no triangular arbitrage, how many British pounds does it take to buy one euro?

A) 1.558

B) 1.1655

C) 0.6006

D) 1.2257

? The spot C$/US dollar exchange rate is 1.5537 . The 3-month forward rate is 1.5505 C$/US$. What is the C$'s forward premium (or discount) on the US dollar, expressed as an annual rate?

A) 0.83% premium

B) 0.83% discount

C) 1.3% premium

D) 1.3% discount

E) None of the above

? Assume that international capital markets are competitive and that the Fisher hypothesis holds. The one-year interest rate is approximately 10% in the USA and 5% in Switzerland. If the expected inflation rate is 6% in the USA, what is the expected inflation rate in Switzerland? (Approximately)

A) 16%

B) 10%

C) 1%

D) 5%

E) None of the above

#### Solution Preview

? The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price of $27/share, calculate the value of a right.

A) $3/right

B) $1/right

C) $2/right

D) None of the above

1,000,000 shares x $30/share = $ 30 million

Number of additional shares required= 13.5 million/ 27=500,000

Total number of shares after raising 13.5 million= 1,000,000 + 500,000=1,500,000= 1.5 million

shares

Value= $ 30 million + $ 13.5 million= $ 43.5 million

Price per share = 43.5 million / 1.5 million shares = $ 29 per share

Therefore value of a right = Rights on share price- Ex rights share price= $ 30- $ 29 =$ 1 / right

Answer : B) $1/right

? Company X has 100 shares outstanding. It earns $1,000 per year and expects repurchase its shares in the open market instead of paying dividends. Calculate the stock price at the end of year-1, if the required rate of return is 10%.

A) $110

B) $ 90

C) $100

D) none of the above

Answer: A) $110

Price per share now = (1000/10 %)/100 = 100

Growth = 10 %

Therefore price at the end of 1 year = 100 ( 1+ 10%)=110

? If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of tax is different because:

A) Capital gains are actually taxed, while dividends are taxed on paper only

B) Dividends are taxed when distributed while capital gains are deferred until the stock is sold

C) Both dividends and capital gains are taxed every year

D) Both A and C

Answer: B) Dividends are taxed when distributed while capital gains are deferred until the stock is sold

? Under what conditions would a policy of maximizing the value of the firm not be the same as a policy of maximizing shareholders' wealth?

A) If the issue of debt increases the probability of bankruptcy

B) If the firm issues debt for the first time

C) If an issue of debt affects the value of existing debt

D) If the beta of equity is positive

Answer: A ) If the issue of debt ...

#### Solution Summary

The solutions provides explanations to 15 multiple choice questions on rights issue , required rate of return, dividends, capital gains, maximizing shareholder's wealth, leverage, refinancing, capital structure, cross rate, triangular arbitrage, forward premium, Fisher hypothesis, purchasing power parity.