Using leverage to repurchase a significant percentage of outstanding shares is termed as:

• A) Leveraged recapitalization
• B) Leveraged buyout
• C) Financial leverage
• D) Repurchase stock

If debt is risk free and the risk free interest rate is constant, then the present value of interest tax shield will be equal to:

• A) Marginal tax rate / Interest payment
• B) Marginal tax rate * Debt
• C) Marginal tax rate / Debt
• D) Marginal tax rate + Interest earned

Identify incorrect from given statements regarding forward loan.

• A) The forward loan is not a type of synthetic forward
• B) The loan arrangement starts now, but the actual loan starts at some future dates.
• C) A forward loan would not commence until a predetermined date in the future
• D) In the forward loan, someone agreed today on the interest rate to be charged in future

With tax-deductible interest, the effective after-tax borrowing rate is:

• A) Cost of debt / (1 + corporate tax rate)
• B) Cost of debt × (1 + corporate tax rate)
• C) Cost of debt × (1 - corporate tax rate)
• D) Cost of debt / (1 - corporate tax rate)

What will be the impact on bond duration if bonds are sold at par or at a premium to par?

• A) Duration always increases with maturity
• B) Duration is insensitive to bond pricing
• C) All of the given options
• D) Duration always decreases with maturity

The total value of the levered firm exceeds the value of the firm without leverage due to:

• A) The present value of the tax paid on debt.
• B) The present value of the interest earned from debt.
• C) The present value of the tax savings from debt.
• D) The present value of the interest expense from debt.

According to signalling theory, a sudden increase in dividends by a firm is most likely interpreted by investors as a signal of:

• A) Stability
• B) Losses
• C) Confidence
• D) Dilution

As a real option, _________ shows the ability of a company to retain temporarily shut down of its operations.

• A) abandonment
• B) timing
• C) switching
• D) expansion

In the absence of an arbitrage, the price of a security equals to:

• A) Opportunity cost of capital
• B) Present value of cash flows
• C) Future value of cash flows
• D) Market risk premium

Which of the following statements is not correct regarding the upward sloping of the Term Structure of Interest Rates?

• A) Investors require large liquidity premiums on long-term bonds
• B) The yield curve is a good predictor of a business cycle
• C) Interest rates are expected to decrease.
• D) A “new” forward rate higher than the average of the past observed interest rates

___________ is considered as the most significant limitation of the Black-Scholes model when applied to American options.

• A) Arbitrage
• B) Volatility
• C) Dividend
• D) Expiration

Cash holdings reduce the required risk premium on a firm’s assets because:

• A) All of the given options are correct
• B) Cash is a cushion against risk
• C) Cash is treated as negative debt
• D) Cash is a risk-free asset

Which of the following conditions must be satisfied for a stock to be considered underpriced stock?

• A) The expected return is more than the required return.
• B) All of the given options
• C) The expected return is equal to the required return.
• D) The expected return is less than the required return.

Interest Tax Shield is calculated as:

• A) Corporate Tax Rate × Interest earned
• B) Corporate Tax Rate × EBIT
• C) Corporate Tax Rate × Interest payments
• D) Corporate Tax Rate × Net income

The flexibility to switch inputs or production processes represents ____________ in real option.

• A) deferral
• B) expansion
• C) growth
• D) switching

In the presence of corporate taxes, the value of a levered firm is equal to:

• A) Value of an unlevered firm + future value of interest tax shield
• B) Value of an unlevered firm + present value of interest tax shield
• C) Value of an unlevered firm + present value of tax expense
• D) Value of an unlevered firm + present value of interest tax expense

After a 2-for-1 stock split, what happens to the number of outstanding shares?

• A) Halves
• B) Doubles
• C) Fixes
• D) Drops

Which of the following determines the present value of financial distress cost?

• A) The appropriate discount rate for the distress costs
• B) The probability of financial distress
• C) The magnitude of the costs if the firm is in distress
• D) All of the given options are correct

If the intrinsic value of the stock is less than its current market price, it implies

• A) Stock is at par, and investors should buy
• B) Stock is underpriced, and investors should buy
• C) Stock is over-valued, and investors should sell
• D) Stock is over-valued, and investors should buy

If the intrinsic value of the stock is equal to its current market price, it implies

• A) Stock is underpriced, and investors should buy
• B) Stock is over-valued, and investors should buy
• C) Stock is over-valued, and investors should sell
• D) Stock is at par and depends upon investor preference