Exam 19: Financing and Valuation

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 value of the firm.

Discounting free cash flows at the WACC assumes that debt is rebalanced every period to maintain a constant ratio of debt to market value of the firm.

What method would you tend to use for evaluating international projects?

Adjusted present value is equal to base-case NPV plus the sum of the present values of any financing side effects.

Flotation costs are incorporated into the APV framework by

A firm has a project with an NPV of −$52 million. If it has access to risk-free government financing that can create a permanent annual tax shield of $5 million, what is the APV of the project assuming the risk-free interest rate is 6 percent?

Johnston Company has a 7 percent cost of debt, a 50 percent debt ratio, and a 15 percent cost of equity. The marginal tax rate is 25 percent. What is Johnston's WACC if it were 100 percent equity financed?

What discount rate should be used for calculating the present value of safe, nominal cash flows?

One should determine the after-tax weighted average cost of capital by

The APV method is most useful in analyzing

While calculating the weighted average cost of capital, which values should one use for D, E, and V?

In the second step of the 3-step process to adjust WACC when debt ratios change, one should use the following formula: r_E = r + (r − r_D)× (D/V).

Project M requires an initial investment of $25 million. The project is expected to generate $2.25 million in after-tax cash flow each year forever. Calculate the IRR for the project.

What are some of the additional factors that have to be considered when analyzing an international project? Briefly explain.

Given are the following data for Outsource Company: PV (of FCFs for years 1-3)= $35 million; PV (horizon value)= $65 million. Calculate the value of the firm.

To calculate the total value of the firm (V), one should rely on the

Given are the following data for year 1: Profits after taxes = $14 million; Depreciation = $6 million; Interest expense = $6 million; Investment in fixed assets = $12 million; Investment in working capital = $3 million. The corporate tax rate is 25 percent. Calculate the free cash flow (FCF)for year 1.

Free cash flow (FCF)and net income (NI)differ in the following ways: I.Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated assuming all flows go to equity holders. II.Net income is calculated after various noncash expenses, including depreciation; FCF adds back depreciation. III.Capital expenditures and investments in working capital do not appear in net income calculations; they do reduce free cash flows. IV.Net income is never negative; free cash flows can be negative for rapidly growing firms, even if the firm is profitable, because investments can exceed cash flows from operations.

A firm has debt beta of 0.2 and an asset beta of 1.9. If the debt-equity ratio is 75 percent, what is the levered equity beta?

The MFC Corporation has decided to build a new facility. It estimates the cost of the facility at $9.7 million. MFC wishes to finance this project using its traditional debt-to-equity ratio of 1.5. The issue cost of equity is 6 percent, and the issue cost of debt is 1 percent. What is the total flotation cost of raising funds?