Answers to Midterm 2

Name R e Midterm 2 FINA 311 November 08, 2022 1. (5 Points) "The pecking order theory implies that profitable firms use less debt than unprofitable firms." Is this statement true or false? Explain. 4 ) . , $ % : ¥ Faln., T e ReckRng 0ol Tneadd TS '*\/\.c':&,;\t' V\: VOV sy QC&"%"E—C \'?3 NALAL l\'\'\r\ W{'\&ng ?3\%"\ ngzha \Q'Q'M u\'v = <\ Qe Alion. Adelsnt @\ Moo 1secineg new)d SuecaresS . YPeoxtP vrolble P rons '\'\'&00__. e Yool o s L_o N % NS Pro T i tade \e .;: W pk et C O U A e O e cecalned eao cnivg s Yo N N A Co e %¢@$Qm == "\"L—\&.«s s s < Aa\, kb | u'f\?"'a'{—\.\v@\o\e' I P do "ah \navve ?— YL\C) \Lfi%\/\ VL&O b on QC; CS_o S A ('\Cs$ \ SO %%'3 \'\C'*'OQ-' Yo CL\\% S O Aelds ?o(" M el XV maencae \ & 2. (5 Points) "An underwriter's compensation is his gross spread." Is this statement true or false? Explain. N cu.2e . ;ggare,cx,,cx Te Mue é';\""'w@gfi ~ e afom< Leruwe o Voo O ndecudtitTed s W Dl POV Ao\ \r\\s' oS YTe o] Ny Roves . U SXYXec\ oy OCICe. NS Ao o ok Wit Moo oA oD Mvess se\\g Vo S\woseg, T\ A oSS = Q Ce o 's R Uovnedoe WeL v ecrt's QPGQ%'(; : Page 1 of 5
3. (5 Points) "IPO underpricing will benefit the new shareholders of the issuing firm. But it will not help the existing shareholders of the issuing firm." Is this statement true or false? Explain. N\ rue W\Wwewn X Po | Mal - W e o sweou—es ok o RS Yoo Mo v docwd o b e - e ool ders SR Vo vl weewn odole 'o W B9 o ele wd Moosc Ceol ' g g 'Q?&L'\ < . . =) ? Z '\JD \' \'Q_QSQJ 4 —<wae o\dA S VoM AL e Ce LA \hove 2 aned oo Ce \ = \wvioAaes IR Xl re uwooso NO uflé&,r'%i\\ %"j—fig; N W\ ere- = VNS v @\ \—-@,,?'c oy Vus b aodo\e e c\' N | L Awis =t daten . Thwece \s o of poctunity Cost Yo Ve oSiQinal shareWwoldars | 4. (9 Points) a) Draw a graph and show how the value of the firm changes as debt changes, according to the static theory of capital structure. VLS N e'"fl SN MMAe T 0w Vo lugs, o { | [ i { l e ! De st bO b) Explain your graph. phy At | A valae oy Y- T &1 PRSI ~ WV \ o e dalst W L e Ao Aodo b | Voo o o < A - \ouwd oot Onts X S v Tneoteoa ses Wi KRe woecoornra o6 rfe nbecest Q sy PR Yox =Swiadd ., Twhe Yox Ssavines vnoleaao A=~ Rs VAo se Aabb . At \locaec Owoonts B Deby (ak Swvooabsy Do) | Tere Lot o waore \Skeltveed >\ \D%E'CUP\PQ% : Coste oy Soaina Yo oveld camk_+ 0O p ey S)B\\;\T\i nCleoge g o~ Con 2l AciskTess Cs e DAand Lok O i)\-c_,\,s COsS TS . ?\\,\:_ ve cx('a a_ . T\ Rse U V\\ wasce Huaciane O&'Qg X N - T c) On your graph show the optimal amount of debt. Label it DO. Lbe«n&; h= >\ Voo Yax shidd, Bk M;%\'\ el o~ \ | Page 2 of 5 AN Moo o v oty e Tilens (PT-C HNcc2oae R Salo RN 2aang) bocatins v .
5. (6 Points) ':'5'%"@00\000 X =|AS > \ Millennium Corporation would like to raise money for their expansion. Millennium Corporation would like to have a rights offering. At this time Millennium Corporation has 800,000 shares outstanding. The market price of each share at the present is $45. Millennium Corporation will offer 200,000 new shares through its rights offering. It will sell each new share for $30. a) What is the market value of Millennium Corporation after the rights offering? Show your calculations. ___-\_ (Q, o, 0CS X 35%6) ) N _ 436,000,600 & ¥ pooQ0¥ q L4 2,000,000 I b) What is the value of a share after the rights offering? Show your calculations. w1 R\ 20 (OO0 —— oo & 200,000 . \ S SO . _ & peo0%, N \\QO@\C)O® c) What is the value of a right? Show your calculations. M LSs - WA = 853 Page 3 of 5
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