FIN 311-01

Spring 2013

D Swanton                                                                                        

 Roosevelt University

Principles of Finance

SAMPLE THIRD QUIZ

 

Do all the problems.  Include calculations and/or explanations in your answers wherever appropriate.  More credit will be given for correct reasoning than for correct arithmetic.

 

1.                  Gamma company is about to issue its first bonds, a single issue of 20 year, 5% coupon bonds, which the underwriting investment bank expects to sell for $104.00 per hundred.  The underwriter will charge Gamma a 4% commission for its work.  Gamma’s tax rate is 33%.  What is the cost of Gamma’s new debt capital?

 

2.                  Delta’s outstanding securities are listed in the following table:

 

                                Number outstanding               price                   k         

 

      Common           100,000 sh.                             $100/sh             22% 

      Preferred           100,000 sh.                             $80/sh               14%

      Bonds                20,000    bonds                        $1,000                6%.

 What is Delta’s weighted average cost of capital?

 

3.                  Two securities A and B are traded, and in one year there is a two hour window within which two units of A may be exchanged costlessly for one unit of B and vice versa.  Today the price of A is $50.00.

(a)                If neither security pays any cash throw-off, what is the no-arbitrage price of B?

(b)               If  B sells for $98.00, show how to make an arbitrage profit.

 

4.                  Why is it that in the world of perfect markets the value of a firm does not depend on its financing decisions?

 

5.                  How could the investment decisions of a firm depend on its financing decisions?  At what point in the life of a firm is this problem greatest?