MockFinalExam.docx - CorporateFinance Note:,...

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Some practice questions for the final exam Corporate Finance Note: This is a fast production, I assume there is always one correct answer but I  may have made mistakes. We will try to go through these questions under a time  constraint. °
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1.  Firm A is unlevered and has an equity beta of 1.2 and a firm value of 100. Firm  B has the same asset risk but it is levered. The debt of firm B is risk-free and its  current market value is 20. What is the equity beta of firm B?     °
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2.  Stock Z in one year's time is expected to pay a $4 dividend. So far it has been  paying out as dividends 80% of earnings. The dividends are expected to grow at 5% a year. Suppose stock Z continues on this growth trend. What is the stock price  today if investors require a long-run rate of return of 10%? What part of the stock  price is attributable to the present value of growth opportunities?           °
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3. Compute the present value of interest tax shields generated by the following three debt issues a company is considering. Consider corporate taxes only. Assume the  appropriate discount rate is identical to the yield of the debt. The marginal tax rate  is Tc=40%. - A $1,200 one-year loan at 9%. - A seven-year loan of $1,200 at 9%, no principal is repaid until maturity. - A $1,200 perpetuity at 8%.           °
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4. The static trade-off theory implies that all-else equal: A. The value of a firm does not depend on the level of corporate tax rates B. The value of a firm is higher for firms located in countries with higher corporate  tax rates C. The tax shield of debt is higher for firms located in countries with higher  corporate tax rates D. The tax shield of debt is lower for firms located in countries with higher  corporate tax rates  
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