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1. A firm has a beta of 2.5, cost of debt of 5%, outstanding debt of $10 million, and outstanding equity of $20 million. If the tax rate is 40%, risk-free rate is 2%, and market return is expected to be 7% annually,

a) what should be the cost of equity according to CAPM?

b) what should be the firms WACC?

2. Why do the issuers of bonds NOT seek to minimize the strength and number of covenants in a bond agreement, if they restrain the firm decisions?

A) More covenants allow the equity holders to pay more dividends. B) More covenants can increase the tax savings of the issuer thus increasing firm value. C) More covenants lower the cost of debt. D) More covenants force the company to renegotiate the terms of the bond if they are broken.

3. Which of the following is FALSE about IPO underwriters? A) They are often large investment banks B) They earn money by charging a spread on the shares sold meaning they buy them at a lower price from company and sell them to investors at a higher price C) An average IPO spread is about 7% D) They normally do not charge a spread for SEOs

4. Which of the following is NOT a potential explanation for IPO short-term underpricing? A) Sometimes the IPO firm and the underwriters cannot come up with a fair firm valuation. B) It leaves a positive first impression on the public equity investors for the IPO firm. C) Underwriters have incentives to underprice the shares so they can sell more. D) Asymmetric information implies that a price discount is necessary for outsider investors to be willing to invest.

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