W09 Solution

# W09 Solution - 1FINANCE 401 RYERSON UNIVERSITY Final Exam...

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1 FINANCE 401 RYERSON UNIVERSITY Final Exam – April 20, 2009 - SOLUTION Name:__________________________________ Student #:_______________________________ Professor:______________________________ _ - Time allowed: 3 hours - Aids allowed: None except for an 8’1/2” by 11” double sided cheat sheet and a calculator - The exam is out of 60 marks. There are 60 multiple choice questions. Each multiple choice question is worth 1 mark. - Answer all MC questions on the scan sheet. - Please put your name, student number, and professor’s name on the front of this exam Please use the following information to answer the next FOUR questions. Abdul owns 200 shares of Intec Corp. stock. The firm is currently an all equity firm with a market value of \$42,000,000 and 1,500,000 shares outstanding. Management of the firm is thinking of borrowing 20% of the current value of the firm and buying back shares with the funds. Even if management goes through with the proposed capital structure change, Abdul will keep all of his shares. There are no taxes or other market imperfections. 1. How many shares will Intec Inc. have outstanding after it goes through with its proposed recapitalization? a) 100.000 b) 300,000 c) 500,000 d) 1,200,000 # of shares = ((1-.2)*1.5M) = 1,200,000 2. Which of the following statements is most likely true? a) If Intec Corp. goes through with the recapitalization, the firm’s future EPS will become more volatile. b) If Intec Corp. goes through with the recapitalization, the firm’s future EPS will become more stable. c) If Intec Corp. goes through with the recapitalization, the firm’s future EPS will most likely remain the same as if it would have had it not gone through with the recapitalization. d) If Intec Corp. goes through with the recapitalization, the firm’s future EPS will most likely decline. 1

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3. In words, what must Abdul do if the firm goes through with the recapitalization but Abdul wanted the cash flows from the firm as it is currently capitalized? a) Abdul must borrow cash from the bank and use the borrowed funds to buy more stock in the firm b) Abdul must sell some of his stock and at the same time borrow funds from the bank c) Abdul must sell some of his stock and invest the proceeds in a risk free security (i.e., the bank) d) Abdul must invest some more money in a risk-free security (i.e., the bank) and at the same time buy more stock than he currently owns e) None of the above 4. In numbers, what must Abdul do if the firm goes through with the recapitalization but Abdul wanted the cash flows from the firm as it is currently capitalized? a) Abdul must borrow \$1,120 from the bank and use the borrowed funds to buy more 40 more shares in the firm b) Abdul must sell \$1,120 worth of stock and at the same time borrow \$1,120 from the bank c) Abdul must sell \$1,120 worth of stock and invest the \$1,120 from the sale in a risk free security (i.e., the bank) d) Abdul must invest \$1,120 in a risk-free security (i.e., the bank) and at the same time buy \$1,120
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W09 Solution - 1FINANCE 401 RYERSON UNIVERSITY Final Exam...

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