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)