Essay Mid Term Exam

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FIN413 – Practice Midterm Exam
Fall 2012

Boris Nikolov

William E. Simon Graduate School of Business Administration
University of Rochester

Name ______________________________



Please do not open exam until instructed to do so



Exam is 2 hours



This is a closed book exam



One page of personal notes allowed



Please do not sit in adjacent seats



Please write only in the space provided for each question



You need a pocket calculator



Good luck!

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GRADE SHEET
INSTRUCTOR USE ONLY

Question 1: _____________
Question 2: _____________
Question 3: _____________
Question 4: _____________

Total number of points: _____________

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Problem 1
“The way I see it,”
…show more content…
b) Suppose Zymase has debt of $40 million due at the time of the project’s payoff. Which project has the highest expected payoff for equity holders?

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c) Suppose Zymase has debt of $110 million due at the time of the project’s payoff. Which project has the highest expected payoff for equity holders?

d) If management chooses the strategy that maximizes the payoff to equity holders, what is the expected agency cost to the firm from having $40 million in debt due? What is the expected agency cost to the firm from having $110 million in debt due?

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Problem 4
a) What is Debtor-in-Possession (DIP) financing? What problem does it solve? Who are the most likely DIP creditors?

b) Give one advantage and one disadvantage of a private workout with respect to a Chapter
11 bankruptcy.

c) What type of incentive problem can you solve by issuing convertible debt? What type of firm benefits the most from issuing convertibles?

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d) What happens to the values of equity and debt if the firm takes a project that has a positive NPV and increases the dividend yield?

e) What is Chapter 11 voting? What problem does it solve?

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Appendix
RE  RU 

D
( RU  RD )
E

Pretax WACC 

WACC 

U 

E
D
RE 
RD
ED
ED

E
D
RE 
(1   c ) RD
ED
ED

 E  (1   )  D
1  (1   )

D
E

D
E

 E  U  ( U   D )(1   )



D
E

ERi   R f  i ERm   R f



VL  VU

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