Question 1

Consider the following equation: rwacc =   rE +   rD(1 - τc)
The term rD(1 - τc)in this equation is:

Accepted Answer

A) the required rate of return on debt. 
B) the dollar amount of equity. 
C) the after-tax required rate of return on debt. 
D) the required rate of return on equity. 
A) the required rate of return on debt. 
B) the dollar amount of equity. 
C) the after-tax required rate of return on debt. 
D) the required rate of return on equity.

Question 2

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

Accepted Answer

A) the firm's target debt to value ratio. 
B) the firm's target debt to equity ratio. 
C) the investment's debt capacity. 
D) the dollar amount of debt outstanding at time t. 
A) the firm's target debt to value ratio. 
B) the firm's target debt to equity ratio. 
C) the investment's debt capacity. 
D) the dollar amount of debt outstanding at time t.

Question 3

Use the information for the question(s)below.
Omicron Industries' Market Value Balance Sheet ($ Millions)
and Cost of Capital   Omicron Industries' New Project Free Cash Flows (Millions)   Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt to equity ratio.
-Calculate the debt capacity of Omicron's new project for years 0,1,and 2.

Accepted Answer

rwacc = @#IMG-DLM& rE + @#IMG-DLM& rD (1 - τc),where D = net

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) To determine the project's debt capacity for the interest tax shield calculation,we need to know the value of the project. 
B) To compute the present value of the interest tax shield,we need to determine the appropriate cost of capital. 
C) Because we don't value the tax shield separately,with the APV method we need to include the benefit of the tax shield in the discount rate as we do in the WACC method. 
D) A target leverage ratio means that the firm adjusts its debt proportionally to the project's value or its cash flows. 
A) To determine the project's debt capacity for the interest tax shield calculation,we need to know the value of the project. 
B) To compute the present value of the interest tax shield,we need to determine the appropriate cost of capital. 
C) Because we don't value the tax shield separately,with the APV method we need to include the benefit of the tax shield in the discount rate as we do in the WACC method. 
D) A target leverage ratio means that the firm adjusts its debt proportionally to the project's value or its cash flows.

Question 5

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 WACC method is closest to:

Accepted Answer

A) $137 million. 
B) $180 million. 
C) $230 million. 
D) $240 million. 
A) $137 million. 
B) $180 million. 
C) $230 million. 
D) $240 million.

Question 6

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.
-Iota's weighted average cost of capital is closest to:

Accepted Answer

A) 8.40%. 
B) 9.75%. 
C) 10.85%. 
D) 11.70%. 
A) 8.40%. 
B) 9.75%. 
C) 10.85%. 
D) 11.70%.

Question 7

Use the information for the question(s)below.
Omicron Industries' Market Value Balance Sheet ($ Millions)
and Cost of Capital   Omicron Industries' New Project Free Cash Flows (Millions)   Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt to equity ratio.
-The interest tax shield provided by Omicron's new project in year 1 is closest to:

Accepted Answer

A) $3.00 million. 
B) $0.63 million. 
C) $50.25 million. 
D) $17.60 million. 
A) $3.00 million. 
B) $0.63 million. 
C) $50.25 million. 
D) $17.60 million.

Question 8

Use the following information to answer the question(s)below.
Wyatt Oil is considering an investment in a new project with an unlevered cost of capital of 11%.Wyatt's corporate tax rate is 21% and its debt cost of capital is 6%.The project has free cash flows of $25 million per year which are expected to decline by 3% per year.
-If Wyatt adjusts its debt once per year to maintain a constant debt-equity ratio of 50%,then the value of this new project is closest to:

Accepted Answer

A) $188 million. 
B) $184.4 million. 
C) $320 million. 
D) $340 million. 
A) $188 million. 
B) $184.4 million. 
C) $320 million. 
D) $340 million.

Question 9

Use the information for the question(s)below.
Suppose Luther Industries is considering divesting one of its product lines.The product line is expected to generate free cash flows of $2 million per year,growing at a rate of 3% per year.Luther has an equity cost of capital of 10%,a debt cost of capital of 7%,a corporate tax rate of 21%,and a debt-equity ratio of 2.This product line is of average risk and Luther plans to maintain a constant debt-equity ratio.
-Luther's unlevered cost of capital is closest to:

Accepted Answer

A) 8.0%. 
B) 8.5%. 
C) 9.0%. 
D) 6.4%. 
A) 8.0%. 
B) 8.5%. 
C) 9.0%. 
D) 6.4%.

Question 10

Luther Industries is considering borrowing $500 million to fund a new product line.Given investors' uncertainty regarding its prospects,Luther will pay a 7% interest rate on this loan.The firm's management knows,that the actual risk of the loan is extremely low and that the appropriate rate on the loan is 5%.Suppose the loan is for four years,with all principal being repaid in the fourth year.If Luther's corporate tax rate is 21%,then the net effect of the loan on the value of the new product line is closest to:

Accepted Answer

A) $22 million. 
B) $34 million. 
C) $35 million. 
D) $28 million. 
A) $22 million. 
B) $34 million. 
C) $35 million. 
D) $28 million.

Question 11

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 equity cost of capital,rE,for this project is closest to:

Accepted Answer

A) 5.0%. 
B) 12%. 
C) 15.0%. 
D) 17.0%. 
A) 5.0%. 
B) 12%. 
C) 15.0%. 
D) 17.0%.

Question 12

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:  
-Based upon the three comparable firms,calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.

Accepted Answer

The answer of Use the information for the question(s)below.
The Aardvark...

Question 13

Which of the following is NOT a step in the WACC valuation method?

Accepted Answer

A) Compute the value of the investment,including the tax benefit of leverage,by discounting the free cash flow of the investment using the WACC. 
B) Compute the weighted average cost of capital. 
C) Determine the free cash flow of the investment. 
D) Adjust the WACC for the firm's current debt/equity ratio. 
A) Compute the value of the investment,including the tax benefit of leverage,by discounting the free cash flow of the investment using the WACC. 
B) Compute the weighted average cost of capital. 
C) Determine the free cash flow of the investment. 
D) Adjust the WACC for the firm's current debt/equity ratio.

Question 14

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 free cash flow to equity (FCFE)is closest to:

Accepted Answer

A) $19.2 million. 
B) $23.4 million. 
C) $20.2 million. 
D) $24.0 million. 
A) $19.2 million. 
B) $23.4 million. 
C) $20.2 million. 
D) $24.0 million.

Question 15

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.
-Assuming that to fund the investment Taggart will take on $250 million in permanent debt and ignoring issuance costs,the NPV of Taggart's new rail line is closest to:

Accepted Answer

A) $195 million. 
B) $200 million. 
C) $235 million. 
D) $240 million. 
A) $195 million. 
B) $200 million. 
C) $235 million. 
D) $240 million.

Question 16

Use theUse the firm has only been listed on the stock exchange for a short time,you do not have an accurate assessment of Nielson's equity beta.However,you do have the following data for another firm in the same industry:   Nielson has a much lower debt-equity ratio of .5,which is expected to remain stable,and Nielson's debt is risk free.Nielson's corporate tax rate is 21%,the risk-free rate is 5%,and the expected return on the market portfolio is 10%.
-Nielson's equity cost of capital is closest to:

Accepted Answer

A) 11.3%. 
B) 12.2%. 
C) 14.0%. 
D) 14.4%. 
A) 11.3%. 
B) 12.2%. 
C) 14.0%. 
D) 14.4%.

Question 17

Consider the following equation: rwacc =   rE +   rD(1 - τc)
The term E in this equation is:

Accepted Answer

A) the dollar amount of equity. 
B) the dollar amount of debt. 
C) the required rate of return on debt. 
D) the required rate of return on equity. 
A) the dollar amount of equity. 
B) the dollar amount of debt. 
C) the required rate of return on debt. 
D) the required rate of return on equity.

Question 18

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:  
-Aardvark's unlevered cost of equity is closest to:

Accepted Answer

A) 10.0%. 
B) 10.4%. 
C) 9.5%. 
D) 9.0%. 
A) 10.0%. 
B) 10.4%. 
C) 9.5%. 
D) 9.0%.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) In the flow-to-equity valuation method,the cash flows to equity holders are then discounted using the weighted average cost of capital. 
B) In the WACC and APV methods,we value a project based on its free cash flow,which is computed ignoring interest and debt payments. 
C) In the flow-to-equity (FT
E) valuation method,we explicitly calculate the free cash flow available to equity holders taking into account all payments to and from debt holders. 
D) The first step in the FTE method is to determine the project's free cash flow to equity (FCF
E) . 
A) In the flow-to-equity valuation method,the cash flows to equity holders are then discounted using the weighted average cost of capital. 
B) In the WACC and APV methods,we value a project based on its free cash flow,which is computed ignoring interest and debt payments. 
C) In the flow-to-equity (FT
E) valuation method,we explicitly calculate the free cash flow available to equity holders taking into account all payments to and from debt holders. 
D) The first step in the FTE method is to determine the project's free cash flow to equity (FCF
E) .

Consider the following equation: rwacc = rE + rD(1 - τc) The term rD(1 - τc)in this equation is:

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

Which of the following statements is FALSE?

Which of the following is NOT a step in the WACC valuation method?

Consider the following equation: rwacc = rE + rD(1 - τc) The term E in this equation is:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 18: Capital Budgeting and Valuation With Leverage

Consider the following equation: rwacc = rE + rD(1 - τc) The term rD(1 - τc)in this equation is:

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

Which of the following statements is FALSE?

Which of the following is NOT a step in the WACC valuation method?

Consider the following equation: rwacc = rE + rD(1 - τc) The term E in this equation is:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters