Question 69 interest tax shield, capital structure, leverage, WACC
Which statement about risk, required return and capital structure is the most correct?
The US firm Google operates in the online advertising business. In 2011 Google bought Motorola Mobility which manufactures mobile phones.
Assume the following:
- Google had a 10% after-tax weighted average cost of capital (WACC) before it bought Motorola.
- Motorola had a 20% after-tax WACC before it merged with Google.
- Google and Motorola have the same level of gearing.
- Both companies operate in a classical tax system.
You are a manager at Motorola. You must value a project for making mobile phones. Which method(s) will give the correct valuation of the mobile phone manufacturing project? Select the most correct answer.
The mobile phone manufacturing project's:
Question 241 Miller and Modigliani, leverage, payout policy, diversification, NPV
One of Miller and Modigliani's (M&M's) important insights is that a firm's managers should not try to achieve a particular level of leverage in a world with zero taxes and perfect information since investors can make their own leverage. Therefore corporate capital structure policy is irrelevant since investors can achieve their own desired leverage at the personal level by borrowing or lending on their own.
This principal of 'home-made' or 'do-it-yourself' leverage can also be applied to other topics. Read the following statements to decide which are true:
(I) Payout policy: a firm's managers should not try to achieve a particular pattern of equity payout.
(II) Agency costs: a firm's managers should not try to minimise agency costs.
(III) Diversification: a firm's managers should not try to diversify across industries.
(IV) Shareholder wealth: a firm's managers should not try to maximise shareholders' wealth.
Which of the above statement(s) are true?
Question 433 Merton model of corporate debt, real option, option, no explanation
A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:
##V## = Market value of assets.
##E## = Market value of (levered) equity.
##D## = Market value of zero coupon bonds.
##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.
What is the payoff to equity holders at maturity, assuming that they keep their shares until maturity?
Question 834 option, delta, theta, gamma, standard deviation, Black-Scholes-Merton option pricing
Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?
European Call Option | ||
on a non-dividend paying stock | ||
Description | Symbol | Quantity |
Spot price ($) | ##S_0## | 20 |
Strike price ($) | ##K_T## | 18 |
Risk free cont. comp. rate (pa) | ##r## | 0.05 |
Standard deviation of the stock's cont. comp. returns (pa) | ##\sigma## | 0.3 |
Option maturity (years) | ##T## | 1 |
Call option price ($) | ##c_0## | 3.939488 |
Delta | ##\Delta = N[d_1]## | 0.747891 |
##N[d_2]## | ##N[d_2]## | 0.643514 |
Gamma | ##\Gamma## | 0.053199 |
Theta ($/year) | ##\Theta = \partial c / \partial T## | 1.566433 |
Question 854 speculation motive for keeping money, no explanation
What is the speculation motive for keeping money? The speculation motive encourages people to keep money available:
Which one of the following businesses is likely to be a public company in Australia, judging by its name?
Question 979 balance of payments, current account, no explanation
This question is about the Balance of Payments.
Assume that all foreign and domestic assets are either debt which makes interest income or equity which makes dividend income, and vice versa for liabilities which cost interest and dividend payments, respectively.
Which of the following statements is NOT correct?