1. (TCO B) Which of the following statements concerning the MM extension with growth is
NOT CORRECT?
(a) The tax shields should be discounted at the unlevered cost of equity.]
(b) The value of a growing tax shield is
...
1. (TCO B) Which of the following statements concerning the MM extension with growth is
NOT CORRECT?
(a) The tax shields should be discounted at the unlevered cost of equity.]
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under
MM’s original (with tax) assumptions.
(d) For a given D/S, the WACC is greater than the WACC under MM’s original (with tax)
assumptions.
(e) The total value of the firm is independent of the amount of debt it uses.
Question 2.2. (TCO D) Which of the following statements is most correct?
(a) In a private placement, securities are sold to private (individual) investors rather than to
institutions.
(b) Private placements occur most frequently with stocks, but bonds can also be sold in a
private placement.
(c) Private placements are convenient for issuers, but the convenience is offset by higher
flotation costs.
(d) The SEC requires that all private placements be handled by a registered investment
banker.
(e) Private placements can generally bring in funds faster than is the case with public
offerings. (Points : 20)
2. (TCO D) Which of the following is generally NOT true and an advantage of going
public?
(a) Facilitates stockholder diversification.
(b) Increases the liquidity of the firm's stock.
(c) Makes it easier to obtain new equity capital.
(d) Establishes a market value for the firm.
(e) Makes it easier for owner-managers to engage in profitable self-dealings.
Question 3.3. (TCO E) Buster’s Beverages is negotiating a lease on a new piece of
equipment that would cost $100,000 if purchased. The equipment falls into the MACRS
3-year class, and it would be used for 3 years and then sold, because the firm plans to
move to a new facility at that time. The estimated value of the equipment after 3 years is
$30,000. If the borrow and purchase option is used, the cash flows would be the
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