Zeta Technologies has the following projections.It has no non-operating assets.Calculate Zeta's intrinsic value of equity using the FCFE model. $\begin{array}{cccc}&\text { Current }\\ &{\text { year }} & \text { Year 1 } & \text { Year 1 } & \text { Year 3 } \\ \text { FCF }&\mathrm{NA} & \$ 1,000 & \$ 1,200 & \$ 1,248 \\ \text { Total debt }&\$ 3,000 & \$ 3,900 & \$ 4,290 & \$ 4,462\\ \text { Interest rate on debt } & 6 \% & 6 \% & 6 \% & 6 \% \\ \text { Tax rate } & 25 \% & 25 \% & 25 \% & 25 \%\\ \text { Long-term growth rate } & 4 \% \\ \text { Required return on } & \\ \text { equity } & 9 \% \end{array}$

A) $21,165 B) $23,282 C) $25,610 D) $28,171 E) $30,988 A) $21,165 B) $23,282 C) $25,610 D) $28,171 E) $30,988

Gamma Pharmaceuticals has the following financial information for the current year and projected for next year.Calculate Gamma's projected free cash flow to equity. \[\begin{array} { l r r } & { \text { Current } } \\ & \text { year } & \text { Projected } \\ \text { NOPAT } & { \text { NA } } & \$ 1,000 \\ \text { Total operating capital } & \$ 2,000 & \$ 2,200 \\ \text { Total debt } & \$ 900 & \$ 800 \\ \text { Interest rate on debt } & 6 \% & 6 \% \\ \text { Tax rate } & 25 \% & 25 \% \end{array}\]

A) $549 B) $604 C) $664 D) $730 E) $803 A) $549 B) $604 C) $664 D) $730 E) $803

Exam 21: Dynamic Capital Structures and Corporate Valuation

Glassmaker Corporation Data Glassmaker Corporation has a currentcapital structure consisting of $100 million (market value) of 9% bonds and $300 million (market value) of common stock.Glassmaker's beta is 1.5.Glassmaker faces a 25% tax rate.Glassmaker plans on making big changes in operation and capital structure during the next several years.(Its tax rate will remain unchanged.) Under these plans, the free cash flows for Glassmaker are estimated to be $29 million for each of the next 4 years; the horizon value of the free cash flows (discounted at the rate assumed by the compressed adjusted present value (CAPV) approach) is $487 million at Year 4.Glass maker will increase its debt to $140 million in the recapitalization.This will cause the estimatedtax savings due to interest expenses areestimatedto be$3.2 million for each of the next 4 years; the horizon value of the tax shields (discounted at the rate assumed by the CAPV approach) is estimated to be $53 million at Year 4.Glassmaker has no nonoperating assets.Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%. -Refer to data for Glassmaker Corporation.According to the compressed adjusted present value model, what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?

(Multiple Choice)

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Question 21

If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the compressed adjusted present value model calculates the horizon value by discounting the post-horizon free cash flows and post-horizon expected future tax shields at the weighted average cost of capital.

(True/False)

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Question 22

Angelou Corporation has debt worth $150,000, with a yield of 8%, and equity worth $350,000.It is growing at a 5% rate, and its tax rate is 25%.A similar firm with no debt has a cost of equity of 13%.Using the compressed adjusted present value model, what is the value of the firm's tax shield, i.e., how much value does the use of debt add?

(Multiple Choice)

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Question 23

The market value of DeLoach Photography's debt is $200,000 and its yield is 8%.The firm's equity has a market value of $800,000, its free cash flows are growing at a 4% rate, and its tax rate is 25%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value (CAPV) model, what would its total value be if it had no debt?

(Multiple Choice)

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Question 24

Gators Incorporated has the following information for the current year and projected for next year.Calculate its projected free cash flow to equity.(Assume new debt is added at the beginning of the year.) Current year Projected FCF NA \1 ,000 Total debt \ 400 \6 00 Interest rate on debt 6\% 6\% Tax rate 25\% 25\%

(Multiple Choice)

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Question 25

In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the after-tax cost of debt.

(True/False)

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Question 26

The market value of Rudyard Incorporated's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 25%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value model, what is Rudyard's cost of equity?

(Multiple Choice)

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Question 27

Epsilon Consultants has the following projected free cash flows to equity and other information.It has no non-operating assets.Calculate Epsilon's intrinsic value of equity using the FCFE model. Year 1 Year 2 Year 3 FCFE \ 1,000 \ 1,200 \ 1,260 Long-term FCFE growth 5\% Required return on equity 9\% ? ?

(Multiple Choice)

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Question 28

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

(True/False)

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Question 29

Zeta Technologies has the following projections.It has no non-operating assets.Calculate Zeta's intrinsic value of equity using the FCFE model. Current year Year 1 Year 1 Year 3 FCF \ 1,000 \ 1,200 \ 1,248 Total debt \ 3,000 \ 3,900 \ 4,290 \ 4,462 Interest rate on debt 6\% 6\% 6\% 6\% Tax rate 25\% 25\% 25\% 25\% Long-term growth rate 4\% Required return on equity 9\%

(Multiple Choice)

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Question 30

Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

(Multiple Choice)

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Question 31

Kitto Electronics Data Kitto Electronics expects an EBIT of $200,000 for Year-1.EBIT is expected to grow at 6% thereafter.The tax rate is 25%.In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets.Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%. -Refer to data for Kitto Electronics.Using the compressed adjusted present value model, what is Kitto's value of equity?

(Multiple Choice)

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Question 32

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

(True/False)

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Question 33

Gamma Pharmaceuticals has the following financial information for the current year and projected for next year.Calculate Gamma's projected free cash flow to equity. Current year Projected NOPAT NA \ 1,000 Total operating capital \ 2,000 \ 2,200 Total debt \ 900 \ 800 Interest rate on debt 6\% 6\% Tax rate 25\% 25\%

(Multiple Choice)

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Question 34

Eta Edibles had free cash flow to equity, required return, and long-term growth rate as indicated below.Eta has no non-operating assets.Calculate Eta's intrinsic value of equity using the FCFE model. Most recent FCFE \ 1000 Required return on equity 9\% Long-term growth rate 4\%

(Multiple Choice)

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Question 35

In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the after-tax cost of debt.

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Eta Edibles had free cash flow to equity, required return, and long-term growth rate as indicated below.Eta has no non-operating assets.Calculate Eta's intrinsic value of equity using the FCFE model. Most recent FCFE \ 1000 Required return on equity 9\% Long-term growth rate 4\%

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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