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FIN401 EXAM.doc

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Department
Finance
Course Code
FIN 401
Professor
mr.anon

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Final Exam 2009my SOLUTIONsPlease use the following information to answer the next FOUR questionsAbdul owns 200 shares of Intec Corp stockThe firm is currently an all equity firm with a market value of 42000000 and 1500000 shares outstanding Management of the firm is thinking of borrowing 20 of the current value of the firm and buying back shares with the fundsEven if management goes through with the proposed capital structure change Abdul will keep all of his sharesThere are no taxes or other market imperfections1 How many shares will Intec Inc have outstanding after it goes through with its proposed recapitalizationa100000b300000c500000d1200000 of shares1215M12000002 Which of the following statements is most likely trueaIf Intec Corp goes through with the recapitalization the firms future EPS will become more volatilebIf Intec Corp goes through with the recapitalization the firms future EPS will become more stablecIf Intec Corp goes through with the recapitalization the firms future EPS will most likely remain the same as if it would have had it not gone through with the recapitalizationdIf Intec Corp goes through with the recapitalization the firms future EPS will most likely decline3 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 capitalizedaAbdul must borrow cash from the bank and use the borrowed funds to buy more stock in the firmbAbdul must sell some of his stock and at the same time borrow funds from the bankcAbdul must sell some of his stock and invest the proceeds in a risk free security ie the bankdAbdul must invest some more money in a riskfree security ie the bank and at the same time buy more stock than he currently ownseNone of the above14 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 capitalizedaAbdul must borrow 1120 from the bank and use the borrowed funds to buy more 40 more shares in the firmbAbdul must sell 1120 worth of stock and at the same time borrow 1120 from the bankcAbdul must sell 1120 worth of stock and invest the 1120 from the sale in a risk free security ie the bankdAbdul must invest 1120 in a riskfree security ie the bank and at the same time buy 1120 worth of stock in addition to what he currently ownseNone of the abovePlease use the following information to answer the next FOUR questionsPatel et Freres Inc has the following Market Value Balance Sheet and Income StatementPatel et Freres is a nonprofit organization and as such does not pay taxesThere are currently 4000000 shares outstandingRaji Patel the owner is considering borrowing 30 of the current value of the firm and using the funds to buy back equityThe cost of debt is 8Balance SheetCash10000000DebtOther Assets9000000 10000000EquityTotal1000000010000000TotalIncome StatementRevenues8000000Expenses 7000000EBIT1000000Interest0Taxes 0Earnings10000005 What is Patel et Freres current EPSa100b050c025d000eNone of the aboveEPSEBITN1M4M256 What will the EPS be if the firm goes to the proposed capital structure assuming EBIT does not change2
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