Exam 3 Solutions - Spring 2003 Final Exam 1. * Select the...

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1. Select the statement that is most correct . * A. I have correctly filled in my Name and UF ID# and have signed the front of this exam and I have correctly filled in and bubbled in my Name, UF ID#, and Exam Code on my scantron sheet. Therefore I should receive 5 points. B. I have failed to correctly fill in my Name and UF ID# and sign the front of this exam and/or I have failed to correctly fill in and bubble in my Name, UF ID#, and Exam Code on my scantron sheet. Therefore I should not receive 5 points. 2. Which of the following statements is most correct ? A. An increase in the corporate tax rate, all other factors held constant, should lead to an increase in a firm’s weighted average cost of capital. B. A firm can lower its component cost of debt simply by issuing debt with a lower coupon rate. * C. The “enterprise” value of the firm can be found by taking the free cash flow available to all investor’s and discounting it at the firm’s weighted average cost of capital. D. Since most equity is privately placed for publicly traded corporations, flotation costs are negligible, and the firm’s cost of a new issue of common stock will be, therefore, essentially the same as the investor’s required rate of return. E. Since the market value of the firm’s debt and equity will continuously change throughout the day, and since the firm’s book value of debt and equity is much more stable over time, the firm should use book value weight to define its optimal capital structure. 3. Which of the following statements is most correct ? A. The use of modified internal rate of return gets rid of the reinvestment rate problem associated with internal rate of return, but may still lead to multiple internal rates of return. * B. When we calculate a project’s cash flow for a net present value analysis, it is essentially the same as the free cash flow concept discussed at the beginning of the term. That is, the project’s free cash flow is equal to the operating cash flow generated by the project, less the firm’s incremental investment in net operating working capital, less the firm’s incremental investment in gross fixed assets. C. A project’s modified internal rate of return will always be less than its internal rate of return, even if the project has no intervening cash flows over the life of the project. D. Real options embedded within a project have value. Therefore, if a project has an investment timing option (the firm can delay taking on the project), the firm can increase the project’s net present value by exercising the option and simply postponing the date at which the project is taken on. E. If a 10-year project has only a single cash outflow at the start of the project (Year 0) and a single cash inflow at the end of the project (Year 10), then it is impossible to calculate an equivalent annual annuity for the project. FIN 3403 - 2003 Spring Term - Exam 3
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This note was uploaded on 02/10/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Exam 3 Solutions - Spring 2003 Final Exam 1. * Select the...

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