Exam 18: Capital Budgeting and Valuation With Leverage

Use the following information to answer the question(s)below. Galt Industries is expected to generate free cash flows of $24 million per year.Galt has permanent debt of $80 million,a corporate tax rate of 21%,and an unlevered cost of capital of 12% and its cost of debt capital is 6%. -The value of Galt's equity using the APV method is closest to:

Use the table for the question(s)below. Consider the information for the following four firms: -The unlevered cost of capital for "Moe" is closest to:

Which of the following methods are used in capital budgeting decisions?

Use the information for the question(s)below. KT Enterprises is considering undertaking a new project.Based upon analysis of firms with similar projects,KT has determined that an unlevered cost of equity of 12% is suitable for their project.KT's corporate tax rate is 21%,its borrowing rate is 7%,and KT does not believe that its borrowing rate will change if the new project is accepted. -If KT expects to maintain a debt to equity ratio for this project of 1 then KT's project-based WACC,rwacc,for this project is closest to:

The assumption that the firm's debt-equity ratio is constant means:

Which of the following statements is FALSE?

Use the information for the question(s)below. Iota Industries Market Value Balance Sheet ($ Millions)and Cost of Capital Iota Industries New Project Free Cash Flows (Millions) Assume that this new project is of average risk for Iota and that the firm wants to hold constant its debt to equity ratio. -The NPV for Iota's new project is closest to:

Use the information for the question(s)below. Iota Industries Market Value Balance Sheet ($ Millions)and Cost of Capital Iota Industries New Project Free Cash Flows (Millions) Assume that this new project is of average risk for Iota and that the firm wants to hold constant its debt to equity ratio. -The Debt Capacity for Iota's new project in year 0 is closest to:

Consider the following equation: Dt = d × the term d in this equation is:

Use the information for the question(s)below. Aardvark Industries is considering a project that will generate the following free cash flows: You are also provided with the following market value balance sheet and information regarding Aardvark's cost of capital: -The unlevered value of Aardvark's new project is closest to:

Use the information for the question(s)below. Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million.The acquisition is expected to increase Rose's free cash flow by $5 million the first year,and this contribution is expected to grow at a rate of 3% every year thereafter.Rose currently maintains a debt to equity ratio of 1,its corporate tax rate is 21%,its cost of debt rD is 6%,and its cost of equity rE is 10%.Rose Industries will maintain a constant debt-equity ratio for the acquisition. -The Free Cash Flow to Equity (FCFE)for the acquisition in year 0 is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product.Aardvark has identified the following information for three single division firms that offer products similar to the one Aardvark is interested in launching: -The unlevered cost of capital for Anteater Enterprises is closest to:

Use the information for the question(s)below. Aardvark Industries is considering a project that will generate the following free cash flows: You are also provided with the following market value balance sheet and information regarding Aardvark's cost of capital: -Suppose that to fund this new project,Aardvark borrows $150 with the principal to be paid in three equal installments at the end of each year.Calculate the levered value of Aardvark's new project.

Use the table for the question(s)below. Consider the information for the following four firms: -The weighted average cost of capital for "Minie" is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million.The acquisition is expected to increase Rose's free cash flow by $5 million the first year,and this contribution is expected to grow at a rate of 3% every year thereafter.Rose currently maintains a debt to equity ratio of 1,its corporate tax rate is 21%,its cost of debt rD is 6%,and its cost of equity rE is 10%.Rose Industries will maintain a constant debt-equity ratio for the acquisition. -Given that Rose issues new debt of $50 million initially to fund the acquisition,the total value of this acquisition using the APV method is closest to:

Use the following information to answer the question(s)below. Galt Industries is expected to generate free cash flows of $24 million per year.Galt has permanent debt of $80 million,a corporate tax rate of 21%,and an unlevered cost of capital of 12% and its cost of debt capital is 6%. -Galt's WACC is closest to:

Use the information for the question(s)below. KT Enterprises is considering undertaking a new project.Based upon analysis of firms with similar projects,KT has determined that an unlevered cost of equity of 12% is suitable for their project.KT's corporate tax rate is 21%,its borrowing rate is 7%,and KT does not believe that its borrowing rate will change if the new project is accepted. -If KT expects to maintain a debt to equity ratio for this project of .6 then KT's project-based WACC,rwacc,for this project is closest to:

Use the following information to answer the question(s)below. Taggart Transcontinental is considering a $250 million investment to launch a new rail line.The project is expected to generate a free cash flow of $32 million per year,and its unlevered cost of capital is 8%.Taggart's corporate tax rate is 21%.Taggert has 4 million shares of stock outstanding. -Assume that to fund the investment Taggart will take on $150 million in permanent debt with the remainder of the investment funded by a cut in dividends.Assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue,the NPV of Taggart's new rail line is closest to: