Question

1.

Which of the following is true?

	a.	Empirical studies show that stock prices generally decrease following increases in current dividends. According to the signaling theory, this finding is necessarily inconsistent with the indifference proposition.
	b.	Empirical studies show that stock prices generally decrease following increases in current dividends. According to the signaling theory, this finding is not necessarily inconsistent with indifference proposition.
	c.	Empirical studies show that stock prices generally increase following increases in current dividends. According to the signaling theory, this finding is necessarily inconsistent with the indifference proposition.
	d.	Empirical studies show that stock prices generally increase following increases in current dividends. According to the signaling theory, this finding is not necessarily inconsistent with the indifference proposition.

2

Which of the following statements concerning dividends is not true?

	a.	Dividends are relevant.
	b.	Dividend policy is argued to be irrelevant.
	c.	A key assumption in the dividend irrelevance proposition is that the firm's investment policy is set ahead of time and is not altered by the dividend.
	d.	None of the above.

3.

An investor buys a call option to purchase 200 shares. The strike price=$15, Current stock price=$10, Buying price of the call option=$1.5 (per share). At the expiration of the option the price of the share is $17. What is the total gain or loss of the investor?

	a.	Loss $1
	b.	Gain $100
	c.	Loss $100
	d.	Gain $1

4.

Modigliani and Miller argue that the dividend decision __________.

	a.	is irrelevant as the value of the firm is based on the earning power of its assets
	b.	is relevant as the value of the firm is not based just on the earning power of its assets
	c.	is relevant as cash outflow always influences other firm decisions
	d.	is irrelevant as dividends represent cash leaving the firm to shareholders, who own the firm anyway

5.

Vertical mergers are those in which the participants are

	a.	in the same industry.
	b.	in different industries.
	c.	in different phases of the value chain.
	d.	none of the above.

6.

A merger is a combination of businesses in which

	a.	two businesses combine to form a new business.
	b.	the participants are necessarily comparable in size, competitive position, profitability, and market capitalization.
	c.	one of the two firms becomes a wholly owned subsidiary of the other firm.
	d.	none of the above.

7.

Suppose a stock exists with a price of $42, and a call option on the stock exists with an exercise price of $36. What is the approximate minimum value of the call option?

	a.	$ 6.
	b.	$ 0.
	c.	$36.
	d.	$42

8.

Which of the following are commonly cited reasons for Mergers and Acquisitions?

	a.	Synergy
	b.	Market power
	c.	Strategic realignment
	d.	All of the above

9.

All of the following are common motives for a merger or acquisition except for

	a.	financial synergy.
	b.	operating synergy.
	c.	raising the cost of capital.
	d.	buying undervalued assets.

10.

The cost of debt to a corporation at any point in time is:

	a.	the stated interest on the debt instrument.
	b.	equal to the coupon payment.
	c.	greater than the risk-free rate if the bond beta is negative.
	d.	the current market borrowing rate.

Answer 1

1) Solution: Option-d
Explanation: According to the signaling theory, it will be inconsistent that stock prices often increase following a rise in current dividends

2) Solution: None of the above
Explanation: Dividend policy is irrelevant because the dividends timings may not impact the future value of cash flows while dividends are relevant

3) Solution: Gain 100
Working: Gain/loss = Number of shares [Price of the share at expiration - strike price - buying price of call option] = 200 * (17 - 15 - 1.50) = 200 * 0.50 = 100

4) Solution: is irrelevant as the value of the firm is based on the earning power of its assets
Explanation: Modigliani and Miller argue that decision of the dividend is not relevant because the firm's value basis is earning power of its assets

5) Solution: in different phases of the value chain
Explanation: A vertical merger is a type of merger wherein the two or more companies gives the different supply chain functions for a common product

6) Solution: none of the above
Explanation: A merger refers to an agreement that would be uniting two existing companies into a single company

7) Solution: 6
Working: Stock Price $42 - Exercise price $36 = $6

As per policy we have to answer first four questoons, I have answered many more than it