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

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Spring 2003 Final Exam 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 ? *
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