Umeå School of Business and Economics
Umeå University
SE-901 87 UMEÅ
Code: _____________
Hand in time: _____________
EXAMINATION
Course code:
Master’s Program in Accounting and Finance
Module 2
Advanced Corporate Finance, 7.5 ECTS
Date and time:
December 6, 2021,
Examination hall:
Instructions (read carefully)
Umeå University’s and Umeå School of Business, Economic and Statistics’ rules and regulations in the examination halls – rules for
examinees apply to the examination.
Students are permitted the use of pocket calculator (with empty memory), and unmarked language dictionary (i.e. not a
financial/business dictionary).
The exam encompasses 100 marks, calculations and short answers (24 marks), multiple choice questions (24 marks), and essay
questions (52 marks). Please check!
Please provide the code given you by the examiners on each page of your exam response. There is NO NEED to use separate sheets
for each question. For essay questions, it is required to keep the answers well constructed. For numerical questions, provide
complete solutions, including important assumptions and formulas. Only the result will not receive points. If you for any reason
do not understand a question, or part of a question, state and explain a realistic assumption and then continue. The questions are
to be answered in English.
Submit the entire examination to the invigilator at the end of your examination period or when you complete the exam. The
invigilator will also require you to identify yourself and present a valid ID.
Appendix 1.
Formula sheet.
Calculations and short answers
Multiple Choice
Questions
Essay questions
Question
1
2
3
4:1-8
5
6
7
Sum
Max no.
of marks
8
8
8
24
18
18
16
100
Your
marks
Grade:
-
Pass with Distinction
Pass
Good luck!
Fail
Important words to understand in order to answer the essay questions correctly
Describe - To describe something means to illustrate the meaning of a phenomenon or a model, and clarify the key
elements of the phenomenon or model. Hence, to describe is to carefully describe the various parts, their relationship
to each other and the whole in order to demonstrate knowledge of the phenomenon/model. To describe in an
academic context is not the same as to briefly highlight a meaning.
Explain - To explain means in addition to describing every aspect of a concept or model also a demonstration of
understanding of how a concept/ model work in a larger whole. By explaining, you show to the reader that you have
understood the concept or model and its significance. To explain is thus more than just to provide a synonym or a very
brief description.
Exemplify - In order to exemplify you need to give an example of how a concept or a model could be applied or used
in practice. It is not enough to name a setting there the use of the model would be useful but rather to describe the
setting, situation or context and how it would be applied there.
Analyze - To analyze means to divide a social phenomenon (e.g. model of leadership, social situation), or physical
objects (e.g. design, interior, engine) into its component parts, examining how they relate to or affect each other and
the wider environment, to finally summarize and synthesize or to give a recommendation. To analyze is thus more
than to describe or reproduce the models or to categorize the phenomena.
Discuss - To discuss means to summarize and compare different ideas, issues and models (e.g. right/wrong, good/bad)
of the phenomenon under discussion. To discuss, in an academic context, is not the same as you do when talking with
your friends and not just a description of a phenomenon.
Reflect - To reflect means to, with distance to one’s own opinions and values, relate to a phenomenon and/or a theory
by critically considering this/these from different perspectives. To reflect is a planned and systemized review using the
thinking and the concepts accepted within the specific field of knowledge. Thus reflection leads to alternative solutions
or recommendations with pros and cons critically evaluated (on the one hand/on the other). Consequently, reflection
is not the same thing as to aimlessly think about things/phenomena in your environment.
Calculations with short answers (24 marks)
Question 1 Financing and Valuation (8 marks)
Given are the following data for North Corporation:
Market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million; Market
price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million. Calculate the
proportions of debt (D/V) and equity (E/V) for Golf Corporation that you should use for estimating its weighted
average cost of capital (WACC): Explain your answer clearly!
(8 marks)
Question 2 Mergers and acquisitions (8 marks)
Assume the following data:
Suppose that Firm A offers 250,000 shares of the combined firm, Firm AB, to Firm B's shareholders. Calculate the
cost of the merger. Explain your answer clearly!
Question 3 Financing, Valuation (8 marks)
Firm A and Firm B are identical except that A is incorporated while B is an unlimited liability partnership. Both have
assets worth $500,000 ($500K) funded with a debt ratio of 40%. Suppose that the assets suddenly become
worthless, what is the maximum possible loss to the equityholders of each company? Explain your answer clearly!
(8 marks)
Multiple Choice Questions (24 marks)
Question 4:1-8 Multiple Choice Questions (8 questions, 3 marks possible each)
Please mark the one correct answer (considering the main text of this course) for each of the following
multiple choice questions (3 marks for each correct answer, 0 marks for each incorrect answer, and 0
marks if you mark two or more answers):
Question
1. Which type of voting allows minority shareholders to
Alternatives:
Alternatives
allocate their votes in a manner to increase the chance of
A. majority voting
electing a director?
B. cumulative voting
C. representative voting
D. executive voting
2. In a uniform-price auction
A. all winning bidders pay the price that they bid.
B. all winning bidders pay a price that is the highest bid.
C. all winning bidders pay a price that is the lowest winning
bid.
D. all winning bidders receive their full allocation.
3. The law of conservation of value implies that:
A. the return on a firm's common stock is unchanged when
debt is added to its capital structure.
B. the value of any asset is preserved regardless of the
nature of the claims against it.
C. the return on a firm's debt is unchanged when common
Alternative:
A.
B.
C.
D.
Alternative:
A.
B.
C.
D.
stock is added to its capital structure.
D. the value of an asset increases as debt is reduced.
4 What does "risk shifting" imply? :
A. When faced with bankruptcy, managers tend to invest in
high-risk, high-return projects.
B. When faced with bankruptcy, managers do not invest
more equity capital.
C. When faced with bankruptcy, managers may make
Alternative:
A.
B.
C.
D.
accounting changes to conceal the true extent of the
problem.
D. When faced with bankruptcy, managers invest in low risk
projects to conserve capital.
5. Suppose an investor sells (writes) a put option. What will
happen if the stock price on the exercise date exceeds the
exercise price?:
Alternative:
A.
B.
C.
D.
A. The seller will need to deliver stock to the owner of the
option.
B. The seller will be obliged to buy stock from the owner of
the option.
C. The owner will not exercise his option.
D. The option will extend for nine more months.
6. Firm A has a value of $100 million and Firm B has a value
A. $30 million
of $70 million. Merging the two would enable cost savings
B. $20 million
with a present value of $20 million. Firm A purchases Firm B
for $75 million. What is the gain from this merger?
C. $15 million
D. $75 million
7. Consider a four-tier pyramid and a single operating
A. 13%
company. Assume that 51% of the votes confer control at
B. 26%
each tier. What is the minimum percentage ownership
C. 50%
(approximately) at the highest level in the pyramid that will
enable control of the operating company?
D. 51%
8 Investors are particularly averse to the possibility of even a
A. market efficiency theory
very small loss and need a high return to compensate for it.
B. random walk theory
Such a concept is related to which theory?
C. convergence trading
D. prospect theory
Essay Questions (52 marks)
Please answer the following essay questions using the text (text book and articles) associated with the
course and the discussions during the course!
Question 5. Financial Analysis (18 marks)
a) What are some of the pitfalls, discuss at three types of pitfalls, involved in using financial ratios? Explain your
answer clearly. (9 marks)
b) Discuss the DuPont system. Explain your answer clearly. (9 marks)
Question 6. Capital Structure and Debt (18 marks)
a) Discuss bankruptcy costs. Explain your answer clearly. (9 marks)
b) Discuss some at least three different examples of conflicts of interest that may arise between bondholders
and stockholders when a firm is in financial distress. Explain your answer clearly. (9 marks)
Question 7. Options and financial instruments (16 marks)
a) Explain why a call option is always riskier than a simple investment in the underlying stock. (8 marks)
b) Explain the term option delta. (8 marks)