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# Corporate Finance

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## Quiz 14 : Capital Structure in a Perfect Market

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. -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 after the dividend is paid would be closest to:
Free
Multiple Choice

C

Equity in a firm with no debt is called:
Free
Multiple Choice

B

Which of the following statements is FALSE?
Free
Multiple Choice

A

Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$80,000 at the risk-free rate,then the value of the firm's levered equity from the project is closest to:
Multiple Choice
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$45,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?
Essay
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$80,000 at the risk-free rate,then the cash flow that equity holders will receive in one year in a strong economy is closest to:
Multiple Choice
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a weak economy is closest to:
Multiple Choice
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the value of the firm's levered equity from the project is closest to:
Multiple Choice
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$80,000 at the risk-free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to:
Multiple Choice
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. -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 expected return of Nielson's stock just after the dividend is paid would be closest to:
Multiple Choice
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a strong economy is closest to:
Multiple Choice
Which of the following statements is FALSE?
Multiple Choice
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. -The expected return for Nielson Motors stock without leverage is closest to: Multiple Choice Answer: Use the information for the question(s)below. Consider a project with free cash flows in one year of$90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is$80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -The NPV for this project is closest to:
Multiple Choice
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows$80,000 at the risk-free rate,then the cost of capital for the firm's levered equity is closest to:
Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or$117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment,the project is sold to investors as an all-equity firm.The equity holders will receive the cash flows of the project in one year.The market value of the unlevered equity for this project is closest to: Multiple Choice Answer: Use the information for the question(s)below. Consider a project with free cash flows in one year of$90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is$80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the cost of capital for the firm's levered equity is closest to: Multiple Choice Answer: Two separate firms are considering investing in this project.Firm Unlevered plans to fund the entire$80,000 investment using equity,while firm Levered plans to borrow \$45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.Construct a table detailing the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.