QUIZ

3 – Finanças Corporativas II


PARTE 1B

DURAÇÃO: 1h:10 para execução + 5’ para entrega = 1h:15’ total

INÍCIO: 07h:10’
TÉRMINO: 08h:20’
ENTREGA: 08h:25’

INSTRUÇÕES DE ELABORAÇÃO E FORMA DE ENTREGA:

1. Faça as questões em uma folha de rascunho e coloque as respostas em uma folha separada.
Essa será a FOLHA DE RESPOSTAS, a qual será entregue pelo e-class.
2. Coloque as respostas de cada grupo em uma folha separada: T or F; MC; Mini-problems.
3. Coloque o nome em todas as folhas.
4. Escaneie todas as páginas da prova em um único arquivo pdf, usando seu celular
(sugestão: APP Adobe Scan: PDF & Card Scanner, disponível gratuitamente na Apple Store;
há também versão em Android)
5. Verifique se está tudo bem legível, caso contrário refaça o escaneamento das páginas
defeituosas.
6. Salve o arquivo em pdf no formato NOME_SOBRENOME_PARTE 1B.
7. Faça upload do arquivo na pasta denominada Quiz3 I3 PARTE 1B no DropBox do e-class
8. Atenção: o DropBox de entrega de tarefas está programado para fechar às 8h:25’
9. Às 8h:35 você receberá a segunda parte do quiz, na qual constarão as instruções para
elaboração e entrega.

Rounding rules:
• values in percent format (%) must be rounded to 2 decimal places
• ratios, percent or discount factors in decimal format must be rounded to 4 decimal
places
• currency values must be rounded to 2 decimal places

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 QUIZ 3 – Finanças Corporativas II

True or False: (20 questions, 1 point each: 2 wrong questions null 1 right)
1. ( ) If a stock's returns follow a random walk pattern, then one should expect to calculate a statistically
significant autocorrelation coefficient, calculated between each successive day's stock returns.
2. ( ) According to the pecking order theory, given the same growth prospect, more profitable firms should
have less debt and thus lower debt ratios on average.
3. ( ) In the second step of the 3-step process to adjust WACC when debt ratios change, one should use the
following formula: rE = r + (r - rD) × (D/E).
4. ( ) The pecking order theory implies that firms prefer debt financing to reinvesting shareholders’
funds.
5. ( ) According to the trade-off theory, more profitable firms should have more debt and thus higher
debt ratios on average
6. ( ) A stock's price is based on the expected present value, at the market capitalization rate, of all the stock's
future earnings.
7. ( ) The cost of equity capital equals the dividend yield minus the growth rate in dividends for a constant
dividend growth stock.
8. ( ) If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash payment minus Firm
B's value as a separate entity.
9. ( ) The expectations theory implies that the only reason for a declining term structure is that investors
expect spot interest rates to fall.
10. ( ) If capital markets are completely efficient, then the purchase or sale of any security at the prevailing
market price is never a positive-NPV transaction.
11. ( ) Discounting free cash flows at the WACC assumes that debt is rebalanced every period to maintain a
constant ratio of debt to market value of the firm
12. ( ) According to Modigliani and Miller Proposition II, since the expected rate of return on debt is less
than the expected rate of return on equity, the weighted average cost of capital declines as more debt is
issued.
13. ( ) If interest rates change, the price of high-coupon bonds change proportionately more than that of
low-coupon bonds of equal maturity.
14. ( ) The expected return for no growth firms is equal to the earnings–price ratio.
15. ( ) According to Modigliani and Miller Proposition II, the cost of equity increases as more debt is issued,
but the weighted average cost of capital remains unchanged.
16. ( ) The value of a share equals the PV of earnings per share assuming the firm does not grow, plus the NPV
of future growth opportunities.
17. ( ) The Miller and Modigliani dividend irrelevance argument assumes that the firm's investment
policy and debt policy are both settled.
18. ( ) The expected return for growing firms can equal the earnings–price ratio. The key is whether earnings
are reinvested to provide a return equal to the market capitalization rate.
19. ( ) The value of a levered firm, given permanent debt level D, is Value of levered firm = Value of unlevered
firm + (TC)(D). This assumes zero costs of financial distress.
20. ( ) Two bonds have the same maturity, risk rating, and face value, but have different coupon rates. The
bond with a lower coupon rate will have a longer duration.

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Multiple Choice (25 questions, 1 point each: 2 wrong questions null 1 right)
1. One can estimate the dividend growth rate for a stable firm as
A. plow-back rate/the return on equity (ROE).
B. plow-back rate - the return on equity (ROE).
C. plow-back rate × the return on equity (ROE).
D. plow-back rate + the return on equity (ROE).

2. Generally, a bond can be valued as a package of
A. annuity and single payment only.
B. perpetuity and single payment only.
C. annuity and perpetuity only.
D. annuity, perpetuity, and single payment.

3. For a levered firm where bA = beta of assets and bD = beta of debt, the equity beta (bE) equals
A. bE = bA..
B. bE = bA + (D/(D + E)) × [bA - bD].
C. bE = bA + (D/E) × [bA - bD].
D. None of the options are correct.

4. The opportunity cost of capital for a risky project is
A. the expected rate of return on a government security having the same maturity as the project.
B. the expected rate of return on a typical bond portfolio.
C. the expected rate of return on a security of similar risk as the project.
D. the expected rate of return on a well-diversified portfolio of common stocks
.
5. The APV method should be used
A. when the project's level of debt is known over the life of the project.
B. when the project's target debt to value ratio is constant over the life of the project.
C. when the project's debt financing is unknown over the life of the project.
D. when the level of debt doesn't change over the life of the firm.

6. Which of the following actions by an acquiring firm signals its belief that postmerger gains will be
substantially larger than expected?
A. The acquiring firm makes a stock offer, since its stock value is priced lower than it will be postmerger.
B. The acquiring firm makes a cash offer, since this allows the acquirer to solely benefit from gains not yet
reflected in the market.
C. The acquiring firm attempts to gain majority ownership, but not complete ownership.
D. The acquiring firm makes an offer with the condition that management must be replaced

7. Who usually gains the most in a merger?
A. Acquiring firm's shareholders
B. Acquiring firm's management
C. Target firm's shareholders
D. Target firm's management

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8. One can estimate the expected rate of return or the cost of equity capital as follows:
A. Dividend yield - expected rate of growth in dividends
B. Dividend yield + expected rate of growth in dividends
C. Dividend yield/expected rate of growth in dividends
D. (Dividend yield) × (expected rate of growth in dividends).

9. The pecking order theory of capital structure predicts that
A. if two firms are equally profitable, the more rapidly growing firm will end up borrowing more, other things
equal.
B. firms prefer equity to debt financing.
C. firms prefer financing by debt versus internally generated cash.
D. high-risk firms will end up borrowing more.

10. MM Proposition II states that:
I) the expected return on equity is positively related to leverage;
II) the required return on equity is a linear function of the firm's debt to equity ratio;
III) the risk to equity increases with leverage
A. I only
B. II only
C. III only
D. I, II, and III

11. If a bond's volatility is 10.00% and the interest rate goes up by 0.75% (points), then the price of the bond:
A. decreases by 10%
B. decreases by 7.5%
C. increases by 7.5%
D. increases by 0.75%

12. Which of the following are true?
I) Firms have long-run target dividend payout ratios.
II) Dividend changes follow shifts in long-term, sustainable earnings.
III) Managers are reluctant to make dividend changes that might have to be reversed.
A. I only
B. II only
C. III only
D. I, II, and III

13. When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the interest tax
shield is
A. not accounted for by the use of the WACC.
B. considered by deducting the interest payment from the cash flows.
C. automatically considered because the after-tax cost of debt is included within the WACC formula.
D. capitalized by the levered cost of equity.

14. Compared to a firm with unlimited liability, the limited liability feature of common equity results in a
A. lower present value of the interest tax shield.
B. leveraged buyout mechanism
C. higher value to equity holders.
D. higher value to debtholders.

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15. The following are indicators that the firm has a cash surplus:
I) Free cash flow is reliably positive.
II) The firm has a low debt ratio compared to similar firms.
III) The firm has sufficient debt capacity to cover unexpected opportunities or setbacks.
A. I only
B. II only
C. III only
D. I, II, and III

16. What are some of the possible consequences of financial distress?
I) Bondholders, who face the prospect of getting only part of their money back, will likely want the company to
take additional risks.
II) Equity investors would like the company to cut its dividend payments to conserve cash.
III) Equity investors would like the firm to shift toward riskier lines of business.
A. I only
B. II only
C. III only
D. I and II only

17. Which of the following is a statement of weak-form efficiency?
A. If markets are efficient in the weak form, then it is impossible to make consistently superior profits by
using trading rules based on past returns.
B. If markets are efficient in the weak form, then prices will adjust immediately to public information.
C. If markets are efficient in the weak form, then prices will adjust immediately to public information and
prices reflect all information.
D. If markets are efficient in the weak form, then prices reflect all information.

18. If an investor buys a portion (X) of both the debt and equity of a levered firm, then his/her payoff is:
A. (X) × (profits - interest)
B. (X) × (interest)
C. (X) × (profits)
D. none of the options

19. Merging in order to lower financing costs is likely to fail for the following reason:
A. Costs of issuing larger amounts of debt increase.
B. Tax shields decrease for larger companies.
C. Any gain from lowering the required interest rate is offset by increased guarantees on the debt.
D. It is difficult for bondholders to calculate the post-merger debt outstanding.

20. The law of conservation of value implies that
A. the return on a firm's common stock is unchanged when debt is added to its capital structure.
B. the value of any asset is preserved regardless of the nature of the claims against it.
C. the return on a firm's debt is unchanged when common stock is added to its capital structure.
D. the value of an asset increases as debt is reduced.

21. If Firm A acquires Firm B and Firm B's shareholders are given the fraction x of the combined firm, then the
cost of this merger is
A. Cost = (PVAB) - (x) PVB.
B. Cost = (x) PVAB - PVB.
C. Cost = PVAB - (x) PVA
D. Cost = (x) PVAB - (x) PVB.

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22. If an investor buys a portion (X) of the equity of a levered firm, then his/her payoff is
A. (X) × (profits).
B. (X) × (interest).
C. (X) × (profits - interest).
D. (1/X) × (profits - interest

23. Inclusion of restrictions in a bond contract leads to
A. higher agency costs.
B. higher bankruptcy costs.
C. higher interest costs.
D. lower agency costs.

24. For a levered firm:
A. as earnings before interest and taxes (EBIT) increases, earnings per share (EPS) increases by the
same percentage.
B. as EBIT increases, EPS decreases by the same percentage.
C. as EBIT increases, EPS increases by a larger percentage.
D. as EBIT increases, EPS decreases by a larger percentage.

25. One important implication of the efficient markets hypothesis is that most investors
A. should avoid active trading.
B. can benefit by purchasing high-beta stocks.
C. should trade actively to help ensure the highest overall gain in their portfolios.
D. should hold IPO stock issues for the long term.


Mini Problems, Part 1 (problems 1-13): (30 questions, 4 points each: this sections continues in Part 2)
1. The two-year interest rate is 12% and the expected annual inflation rate is 5%. What is the expected real interest
rate?

2. Health and Wealth Company is financed entirely by common stock that is priced to offer a 12 percent expected
return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt
yielding 8 percent, what is the expected return on the common stock after refinancing? (Ignore taxes.)

3. Company X has 100 shares outstanding. It earns $1,200 per year and announces that it will use all $1,200 to
repurchase its shares in the open market instead of paying dividends. Calculate the number of shares
outstanding at the end of year 1, after the first share repurchase, if the required rate of return is 8 percent.

4. An 8%, six-year bond, yields 5%. Assume annual coupon payments. If at the end of the year the yield drops to 2%,
what will the total return to an investor who held the bond over this year?

5. The beta of an all-equity firm is 1.2. Suppose the firm changes its capital structure to 40% debt and 60% equity
using 8% debt financing. The beta of debt is 0.1. What is the equity beta of the levered firm? (Assume no taxes)

6. Analysis of past monthly movements in Wal-Mart's stock price has produced the following estimates: α = 0.45
percent and β = 0.6. If the market index subsequently rises by 5 percent while Wal-Mart's stock price rises by 4
percent, what is the abnormal change in Wal-Mart's stock price?

7. Bombay Company's book and market value balance sheets are as follows:
(NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value):

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According to MM's Proposition I corrected for taxes, what will be the change in company value if Bombay issues
$500 of equity and uses it to make a permanent reduction in the company's debt? Assume a 30 percent marginal
corporate tax rate.

8. The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 15% per year for
the next two years and then 4% per year thereafter. If the required rate of return on the stock is 12%, what is the
current value of the stock?

9. Summer Co. expects to pay a dividend of $5.00 per share—one year from now—out of earnings of $10.00 per
share. If the required rate of return on the stock is 15% and its dividends are growing at a constant rate of 10%
per year, calculate the present value of growth opportunities for the stock (PVGO).

10. A firm has a debt-to-equity ratio of 0.5. Its levered cost of equity is 16 percent, and its cost of debt is 10 percent.
If there were no taxes, what would be its cost of equity if the debt-to-equity ratio were zero?

11. Galaxy Air, previously a no-growth firm, has two million shares outstanding. Until now, it consistently earned
$20 million per year on its assets. (It has no debt and pays out all earnings as dividends. Its cost of capital is 10%)
Due to its newly appointed CEO, Galaxy Air is now able to squeeze out 5% annual growth by plowing back 20% of
earnings. Calculate its stock price per share.

12. -13. Suppose that you buy a two-year 10% bond at 90% of its face value.

12. What will be your nominal return over one year if inflation is 8% in the first year? Assume that the yield to
maturity does not change.

13. Now suppose that the bond in the previous question is a TIPS. What will be your real return?