FINC 5310 FINAL Exam

FINC 5310 FINAL Exam 1 Which of the following statements is most CORRECT? A. To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually. b. The basic doctrine of fairness states that all debtholders must be treated equally. c. The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan. d. While a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely. e. Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern. - Correct Answer-A. To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually. 2 Neuman Corporation Convertible Bonds The following data apply to Neuman Corporation's convertible bonds: Maturity: 10Stock price: $30.00 Par value: $1,000.00Conversion price: $35.00 Annual coupon: 5.00%Straight-debt yield: 8.00% Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's conversion value? a. $734.89 b. $773.57 c. $698.15 d. $814.29 e. $857.14 - Correct Answer-Conversion value = Conversion ratio × Market price of stock = $857.14 3 A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate? a. 1 U.S. dollar equals 0.85 Swiss francs b. 1 U.S. dollar equals 1.44 Swiss francs c. 1 U.S. dollar equals 0.69 Swiss francs d. 1 U.S. dollar equals 1.29 Swiss francs e. 1 U.S. dollar equals 1.21 Swiss francs - Correct Answer-B If PPP holds, the chocolate should cost the same in each country, so that 28.80 Swiss francs equal 20 U.S. dollars. This relationship implies that 1 U.S. dollar equals 1.44 Swiss francs (28.80 SF/20). 4 Which of the following statements is most CORRECT? a. Unlike bonds, preferred stock cannot have a convertible feature. b. Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. c. From the issuer's point of view, preferred stock is less risky than bonds. d. By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock. e. Preferred stock generally has a higher component cost of capital to the firm than does common stock. - Correct Answer-A Unlike Bonds, preferred stock cannot have a convertible feature. 5 The exercise of warrants creates new shares which: A. increases the total number of shares which can reduce the per share value. B. increases share value because cash is paid into the firm at the time of warrant exercise. C. increases the total number of shares but does not affect share value. D. increases the number of shares outstanding while maintaining the current price per share. E. does not change the number of shares outstanding, similar to options - Correct Answer-A. increases the total number of shares which can reduce the per share value