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____ 1. What is the market capitalisation of a company?
a. the market value of all outstanding debt
b. the book value of the company’s debt
c. the market value of all outstanding shares
d. the book value of the company’s total equity
____ 2. Retained earnings represent
a. a pool of cash that a company can use should a need for cash arise.
b. the increased market value, due to management’s efforts, of all of a company’s equity securities issued.
c. earnings that a company reinvested during the company’s history.
d. the cumulative amount of cash that a company has paid out in dividends.
____ 3. Balance Corp. has a weighted average cost of capital equal to 5.5%. If the company is financed with 25% equity and 75% debt and if the after-tax of that debt is 4%, then what is the cost of equity for the company?
a. 0.025
b. 0.06
c. 0.1
d. 0.01
____ 4. __________ represents the value of a company’s equity shown on its balance sheet.
a. Book value
b. Market value
c. Liquidation value
d. Present value
____ 5. An investor bought a share this morning for $50 and plans to sell the share one year from today. The investor believes the share will pay a $1 dividend during the next year and that the share can be sold for $53 in one year. Given the investor’s beliefs, what is the return from investing in this share for the next year?
a. 4%
b. 6%
c. 8%
d. 10%
____ 6. After careful research, you find the present value of the free cash flows of a company to be $100 million. The market value of the company’s preferred shares is $15 million, while the market value of the company’s debt is $40 million. If the company has 2 million shares outstanding, what is the equity value per share?
a. $20.00
b. $22.50
c. $27.50
d. $30.00
____ 7. Which of the following securities poses the greatest financial risk for the investor?
a. ordinary equity
b. preferred equity
c. debt
d. convertible debt
____ 8. Which statement about ordinary shareholders is incorrect?
a. Shareholders only have a residual claim.
b. Shareholders have precedence over all other claimholders in the case of bankruptcy.
c. Shareholders have voting rights.
d. Shareholders are the ultimate owners of a corporation.
____ 9. Bavarian Sausage’s enterprise value is $75 000 000, the market value of its debt is $23 000 000 and the company does not have any preferred shares outstanding. If the company has 3 500 000 shares outstanding, what should be Bavarian Sausage’s share price?
a. $21.43
b. $14.86
c. $28.00
d. $6.57
____ 10. The decision as to whether a company will pay dividends is explicitly made by the
a. shareholders
b. bondholders
c. board of directors
d. chief financial officer
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