Question 1

The total value of a firm is the present value of its free cash flows minus the present value of its horizon value.

Accepted Answer

A) True 
 B)False

Question 2

The MFC Corporation needs to raise $200 million for its mega project. The NPV of the project using all-equity financing is $40 million. If the cost of raising funds for the project is $20 million, what is the APV of the project?

Accepted Answer

A) $40 million 
B) $240 million 
C) $20 million 
D) $160 million 
A) $40 million 
B) $240 million 
C) $20 million 
D) $160 million

Question 3

A project costs $15 million and is expected to produce cash flows of $3 million a year for 10 years. The opportunity cost of capital is 14 percent. If the firm has to issue stock to undertake the project and issue costs are $500,000, what is the project's APV?

Accepted Answer

A) −$352,000 
B) $148,350 
C) $648,350 
D) $952,000 
A) −$352,000 
B) $148,350 
C) $648,350 
D) $952,000

Question 4

What effect will subsidized loans have?

Accepted Answer

A) They will increase the APV of a project. 
B) They will decrease the APV of a project. 
C) They will not affect APV. 
D) None of the options. 
A) They will increase the APV of a project. 
B) They will decrease the APV of a project. 
C) They will not affect APV. 
D) None of the options.

Question 5

Generally, subsidized loans decrease the APV of a project.

Accepted Answer

A) True 
 B)False

Question 6

One can estimate the value of a firm by calculating the present value of free cash flows using the WACC (weighted average cost of capital)for the discount rate.

Accepted Answer

A) True 
 B)False

Question 7

Given are the following data for year 1:
Profits after taxes = $20 million; Depreciation = $6 million; Interest expense = $4 million; Investment in fixed assets = $12 million; Investment in working capital = $4 million. The corporate tax rate is 25 percent. Calculate the free cash flow (FCF)for year 1.

Accepted Answer

A) $4 million 
B) $6 million 
C) $8 million 
D) $13 million 
A) $4 million 
B) $6 million 
C) $8 million 
D) $13 million

Question 8

The opportunity cost of capital, used to calculate the base-case for adjusted present value analyses, can be thought of as

Accepted Answer

A) the promised yield rather than the expected yield of an investment. 
B) the rate corresponding to an average debt level among firms in the industry. 
C) the WACC of an all-equity financed version of the firm. 
D) the return on the opportunities exploited by a firm's competitors. 
A) the promised yield rather than the expected yield of an investment. 
B) the rate corresponding to an average debt level among firms in the industry. 
C) the WACC of an all-equity financed version of the firm. 
D) the return on the opportunities exploited by a firm's competitors.

Question 9

A firm uses $30 million of debt, $10 million of preferred stock, and $60 million of common equity to finance its assets. If the before-tax cost of debt is 8%, cost of preferred stock is 10%, and the cost of common equity is 15%, calculate the weighted average cost of capital for the firm assuming a tax rate of 21%.

Accepted Answer

A) 12.4% 
B) 11.9% 
C) 10.84% 
D) 19.27% 
A) 12.4% 
B) 11.9% 
C) 10.84% 
D) 19.27%

Question 10

Given are the following data for Outsource Company: PV (of FCFs for years 1-3)= $35 million; PV (horizon value)= $65 million. Suppose that the market value of the debt = $30 million and the number of shares outstanding = 5 million. Calculate the share price.

Accepted Answer

A) $20 
B) $14 
C) $13 
D) $6 
A) $20 
B) $14 
C) $13 
D) $6

Question 11

Given are the following data for Golf 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).

Accepted Answer

A) 40 percent debt and 60 percent equity 
B) 50 percent debt and 50 percent equity 
C) 45.5 percent debt and 54.5 percent equity 
D) 66.7 percent debt and 33.3 percent equity 
A) 40 percent debt and 60 percent equity 
B) 50 percent debt and 50 percent equity 
C) 45.5 percent debt and 54.5 percent equity 
D) 66.7 percent debt and 33.3 percent equity

Question 12

APV = NPV(base-case assuming all equity financing)− NPV(financing decisions caused by project financing).

Accepted Answer

A) True 
 B)False

Question 13

Financial practitioners usually include short-term debt in WACC calculations if
I.short-term debt is at least 10% of total liabilities;
II.short-term debt is at least 10% of the total assets;
III.net working capital is negative;
IV.net working capital is positive

Accepted Answer

A) I and IV only 
B) I and III only 
C) II and IV only 
D) II and III only 
A) I and IV only 
B) I and III only 
C) II and IV only 
D) II and III only

Question 14

Discuss why WACC is used most often by managers to make capital budgeting decisions.

Accepted Answer

The after-tax weighted average cost of c

Question 15

The following situations typically require that the financial manager value an entire business:
I.If firm A is about make a takeover offer for firm B, then A's financial managers have to decide how much the combined business A + B is worth under A's management.
II.If firm C is considering the sale of one of its divisions or a business line, it has to decide what the division or the business line is worth in order to negotiate with potential buyers.
III.When a firm goes public, the investment bank must evaluate how much the firm is worth in order to set the price.

Accepted Answer

A) I only 
B) I and II only 
C) III only 
D) I, II, and III 
A) I only 
B) I and II only 
C) III only 
D) I, II, and III

Question 16

The Modigliani-Miller (MM)formula for the after-tax discount rate, for the case of fixed perpetual debt, is given by

Accepted Answer

A) rMM = r(1 − TCD/V). 
B) rMM = r(1 + TCD/V). 
C) rMM = r/(1 − TCD/V). 
D) rMM = r/(1 + TCD/V). 
A) rMM = r(1 − TCD/V). 
B) rMM = r(1 + TCD/V). 
C) rMM = r/(1 − TCD/V). 
D) rMM = r/(1 + TCD/V).

Question 17

The BSC Co. was planning to raise $2.5 million in perpetual debt at 11 percent. However, they just received an offer from the governor of a nearby state to raise the financing for them at 8 percent if they locate a new facility in that state. What is the total value added from debt financing if the tax rate is 34 percent and the state subsidizes the loan for the company?

Accepted Answer

A) $2.5 million 
B) $1.2 million 
C) $1.3 million 
D) $0.9 million 
A) $2.5 million 
B) $1.2 million 
C) $1.3 million 
D) $0.9 million

Question 18

A firm has issued $5 par value preferred stock that pays a $0.80 annual dividend. The stock currently sells for $9.50. In calculating WACC, what should one use for the value of the firm's preferred stock?

Accepted Answer

A) $0.80 
B) $4.20 
C) $5.00 
D) $9.50 
A) $0.80 
B) $4.20 
C) $5.00 
D) $9.50

Question 19

Lowering the debt-equity ratio of the firm can change the firm's
I.financial leverage;
II.cost of equity;
III.cost of debt;
IV.effective tax rate

Accepted Answer

A) II and III only 
B) I only 
C) I, II, and III only 
D) I, II, III, and IV 
A) II and III only 
B) I only 
C) I, II, and III only 
D) I, II, III, and IV

Question 20

Consider the following data for Kriya Company:
 
A constant growth rate of 4 percent is sustained forever after year 3. The weighted average cost of capital is 10 percent.
Calculate the present value of the horizon value. (Assume that the horizon value includes the 6.24M FCF in year 4.)

Accepted Answer

A) $90.4 million 
B) $104 million 
C) $78.1 million 
D) $75.1 million 
A) $90.4 million 
B) $104 million 
C) $78.1 million 
D) $75.1 million

Exam 19: Financing and Valuation

The total value of a firm is the present value of its free cash flows minus the present value of its horizon value.

The MFC Corporation needs to raise $200 million for its mega project. The NPV of the project using all-equity financing is $40 million. If the cost of raising funds for the project is $20 million, what is the APV of the project?

A project costs $15 million and is expected to produce cash flows of $3 million a year for 10 years. The opportunity cost of capital is 14 percent. If the firm has to issue stock to undertake the project and issue costs are $500,000, what is the project's APV?

What effect will subsidized loans have?

Generally, subsidized loans decrease the APV of a project.

One can estimate the value of a firm by calculating the present value of free cash flows using the WACC (weighted average cost of capital)for the discount rate.

The opportunity cost of capital, used to calculate the base-case for adjusted present value analyses, can be thought of as

Given are the following data for Outsource Company: PV (of FCFs for years 1-3)= $35 million; PV (horizon value)= $65 million. Suppose that the market value of the debt = $30 million and the number of shares outstanding = 5 million. Calculate the share price.

APV = NPV(base-case assuming all equity financing)− NPV(financing decisions caused by project financing).

Financial practitioners usually include short-term debt in WACC calculations if I.short-term debt is at least 10% of total liabilities; II.short-term debt is at least 10% of the total assets; III.net working capital is negative; IV.net working capital is positive

Discuss why WACC is used most often by managers to make capital budgeting decisions.

The Modigliani-Miller (MM)formula for the after-tax discount rate, for the case of fixed perpetual debt, is given by

A firm has issued $5 par value preferred stock that pays a $0.80 annual dividend. The stock currently sells for $9.50. In calculating WACC, what should one use for the value of the firm's preferred stock?

Lowering the debt-equity ratio of the firm can change the firm's I.financial leverage; II.cost of equity; III.cost of debt; IV.effective tax rate

Consider the following data for Kriya Company: A constant growth rate of 4 percent is sustained forever after year 3. The weighted average cost of capital is 10 percent. Calculate the present value of the horizon value. (Assume that the horizon value includes the 6.24M FCF in year 4.)

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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