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FIN 401
Alan Kaplan

FALL 07 If the firm in the prior question does not achieve its breakeven EBIT (i.e., earns less than its breakeven EBIT):The firm will have a higher EPS if is an all equity firm in comparison to having debt in its capital structure.The cum-div. date is Always before the date of recordStock prices most fall on the ex-div. dateA start-up software company is likely to have the lowest debt/equity ratio an implication of M&M Proposition I, without taxes?: The WACC will not change regardless of the capital structure decisionSome good reason(s) for leasing according to the text book are: a)Taxes may be reduced b) May reduce uncertainty c)It is a source of cash...I only or/and I, II and IIIpossible CF benefits of mergers and acquisition according to the textbook:Revenue Enhancement&Changing capital requirementsIf the shareholders of an acquired firm capture all of the merger's gain, but no more than that, then the:NPV of the merger is zeroSun Life Financial acquired Clarica Life in 2001. Both are Insurance companies. This is an example of a horizontal acquisition.features of the purchase method of accounting? The assets of the target firm must be shown at their fair market value on the books of the bidder. & The difference between the purchase price and the estimated fair market value of the net assets of the target firm must be ctlassified as goodwill and recorded on the balance sheet.IPO: sale of equity, public firstDiv. policy is irrelevant when there are no taxes or other market imperfectionsalternatives to paying div.: Select additional capital budgeting projects, Repurchase shares, Acquire other companies, Purchase financial assetsbased on M&M Proposition II, without taxes?: The cost of equity varies directly with the D/E ratio of the firmfirm commitment offering is Underwriting where the syndicate buys the entire issue from the issuing firm, assuming full financial responsibility for any unsold shares record date of Friday, July 22 for its rights offering. What is the ex-rights date?: Monday, July 18 shares go ex-div. 2 days before the date of record, but shares go ex-rights four days before the date of recordCross-hedging.: Hedging an asset with contracts written on a similar, but not identical, asset.put option is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of believe that the price of SDRInc. stock will fall by 30% by the end of the year. As an inv.tor, you should:Buy puts on STR stocks.A stock currently sells for $16.50. A call option on the stock has an exercise price of $18.00. The call currently sells in the market for $2.50. Which of the following is true?: The time value associated with the call option is $2.50You purchased a May American call option on Netscape stock with an exercise price of $165. thereforeYou have the right to buy Netscape shares for $165 at any time prior to the option expiration, regardless of the stock’s market price.A proposed acquisition of Canadian Imperial Bank of Commerce (CIBC) by Bank of Nova Scotia can best be classified as: Horizontal acquisition. Generally shareholders of an acquiring company seem to benefit very little from takeovers. Some possible explanation(s) are:Mgt. may not be acting in shareholders’ interests & Realized synergies may be less than expected synergies Why will this lease NOT have a positive NAL for both the lessee and the lessor, regardless of how the lease is priced? The lease will not have a positive NAL for both parties because the tax rate is the same for both sides and there are no other market imperfections.If the equipment had belonged in the 50% CCA class instead of the 30% CCA d) There is no relationship between the probability of F.D. for a firm and the ability of that firm to borrow funds WINTER 08 39. Jim owns 1,000 shares of 123 Inc. He would like to earn the same return on his investment that Jane is earning on her investment. He has heard of his concept called homemade leverage. In order to achieve the same rate of return of as Jane earns on her investment in 456 Inc what must Jim do? a) He must sell 500 shares of 123 Inc and invest the proceeds at 8%. b) He must borrow $2,500 and buy 250 more shares of 123 Inc. c) He must borrow $5,000 and buy 500 more shares of 123 Inc. d) He must borrow $10,000 and buy 1,000 more shares of 123 Inc. e) None of the above WINTER 2
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