Fina2222 Practice 1

Practice Set 1 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the following information to answer the question(s) below. Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million. 1) Suppose the risk-free interest rate is 4%. If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend, then according to MM, the market value of its equity just alter the dividend is paid would be closest to: A) $400 million B) $150 million C) $0 million D) $250 million 2) The expected return for Nielson Motors stock without leverage is closest to: A) -12.5% B) -17.5% C) 12.5% D) -25.0% Use the following information to answer the question(s) below. d'Anconia Copper is an all-equity firm with 60 million shares outstanding, which are currently trading at $20 per share. Last month, d'Anconia announced that it will change its capital structure by issuing $300 million in debt. The $200 million raised by this issue, plus another $200 million in cash that d'Anconia already has, will be used to repurchase existing shares of stock. Assume that capital markets are perfect. 3) The market capitalization of d'Anconia Copper before this transaction takes place is closest to: A) $800 million B) $1,100 million C) $900 million D) $1,200 million 4) The market capitalization of d'Anconia Copper after this transaction takes place is closest to: A) $900 million B) $800 million C) $1,100 million D) $1,200 million 5) At the conclusion of this transaction, the number of shares that d'Anconia Copper will repurchase is closest to: A) 40 million B) 5 million C) 20 million D) 15 million Use the following information to answer the question(s) below.

Galt Industries has no debt, total equity capitalization of $600...