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Question 17
1.
From the lessee viewpoint, the riskiness of the cash
flows, with the possible exception of the residual
value, is about the same as the riskiness of the
lessee's
Answer
equity cash flows.
capital budgeting project cash flows.
debt cash flows.
pension fund cash flows.
sales.
4 points
Question 18
1.
Operating leases often have terms that include
Answer
maintenance of the equipment by the lessor.
full amortization over the life of the lease.
very high penalties if the lease is cancelled.
restrictions on how much the leased property can be used.
much longer lease periods than for most financial leases.
4 points
Question 19
1.
Which of the following statements is most
CORRECT?
Answer
Firms that use "off balance sheet" financing, such as leasing, would show lower debt
ratios if the effects of their leases were reflected in their financial statements.
Capitalizing a lease means that the firm issues equity capital in proportion to its
current capital structure, in an amount sufficient to support the lease payment
obligation.
The fixed charges associated with a lease can be as high as, but never greater than,
the fixed payments associated with a loan.
Capital, or financial, leases generally provide for maintenance by the lessor.
A key difference between a capital lease and an operating lease is that with a capital
lease, the lease payments provide the lessor with a return of the funds invested in the
asset plus a return on the invested funds, whereas with an operating lease the lessor
depends on the residual value to realize a full return of and on the investment.
4 points
Question 20
1.
In the lease versus buy decision, leasing is often
preferable
Answer
because it has no effect on the firm's ability to borrow to make other investments.
because, generally, no down payment is required, and there are no indirect interest
costs.
because lease obligations do not affect the firm's risk as seen by investors.
because the lessee owns the property at the end of the least term.
because the lessee may have greater flexibility in abandoning the project in which
the leased property is used than if the lessee bought and owned the asset.
4 points
Question 21
1.
Which of the following are given by the text as valid,
acceptable reasons for the high level of merger
activity in the U.S. during the 1980s?
Answer
Synergistic benefits arising from mergers.
Reduction in competition resulting from mergers.
Attempts to stabilize earnings by diversifying.
All of the above.
Both a and c above.
4 points
Question 22
1.
Which of the following actions can help managers
defend against a hostile takeover?
Answer
Establishing a poison pill provision.
Granting lucrative golden parachutes to senior managers.
Establishing a super-majority provision in the company's bylaws to raise the
percentage of the board of directors that must approve an acquisition from 50% to
75%.
All of the answers above are correct.
None of the answers above is correct.
4 points
Question 23
1.
Which of the following statements is most
CORRECT?
Answer
The high value of the U.S. dollar relative to Japanese and European currencies in the
1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring
many mergers.
During the 1980s, the Reagan and Bush administrations tried to foster greater
competition and they were adamant about preventing the loss of competition; thus,
most large mergers were disallowed.
The expansion of the junk bond market made debt more freely available for large
acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of
merger activity.
Increased nationalization of business and a desire to scale down and focus on
producing in one's home country virtually halted international mergers in the 1980s.
Answers a and b are correct.
4 points
Question 24
1.
Which of the following statements about valuing a
firm using the APV approach is most CORRECT?
Answer
The horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the levered cost of equity.
The horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the cost of debt.
The horizon value is calculated by discounting the expected earnings at the WACC.
The horizon value is calculated by discounting the free cash flows beyond the
horizon date and any tax savings at the WACC.
None of the statements above is correct.
4 points
Question 25
1.
Dunbar Hardware, a national hardware chain, is
considering purchasing a smaller chain, Eastern
Hardware. Dunbar's analysts project that the merger
will result in incremental free flows and interest tax
savings with a combined present value of $72.52
million, and they have determined that the
appropriate discount rate for valuing Eastern is 16%.
Eastern has 4 million shares outstanding and no debt.
Eastern's current price is $16.25. What is the
maximum price per share that Dunbar should offer?
Answer
$16.25
$16.97
$17.42
$18.13
$19.00
4 points
