Exam 18: Valuation and Capital Budgeting for the Levered Firm

Brad's Boat Company,a company in the 40% tax bracket,has riskless debt in its capital structure which makes up 30% of the total capital structure,and equity is the other 70%. The beta of the assets for this business is .9 and the equity beta is:

An appropriate guideline to adopt when determining the valuation formula to use is:

The acceptance of a capital budgeting project is usually evaluated on its own merits. That is,capital budgeting decisions are treated separately from capital structure decisions. In reality,these decisions may be highly interwoven. This may result in:

The appropriate cost of debt to the firm is:

If the WACC is used in valuing a leveraged buyout,the:

Quick-Link has debt outstanding with a market value of $200 million,and equity outstanding with a market value of $800 million. Quick-Link is in the 34% tax bracket,and its debt is considered risk free. Merrill Lynch has provided an equity beta of 1.50. Given a risk free rate of 3% and an expected market return of 12%,calculate the discount rate for a scale enhancing project in the hypothetical case that Quick-Link is all equity financed.

Kelly Industries is given the opportunity to raise $5 million in debt through a local government subsidized program. While Kelly would be required to pay 12% on its debt issues,the Hampton County program sets the rate at 9%. If the debt issue expires in 4 years,calculate the NPV of this financing decision.

A firm is valued at $6 million and has debt of $2 million outstanding. The firm has an equity beta of 1.8 and a debt beta of .42. The beta of the overall firm is:

Alabaster Incorporated has a beta of 1.05,a cost of debt of 8% and a debt to value ratio of .7. The current risk free rate is 3% and the market rate of return is 12.5%. What is the company's cost of equity capital?

The weighted average cost of capital is determined by:

A project has a NPV,assuming all equity financing,of $1.5 million. To finance the project,debt is issued with associated flotation costs of $60,000. The flotation costs can be amortized over the project's 5 year life. The debt of $10 million is issued at 10% interest,with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is 34%,calculate the project's APV.

The BIM Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated to be $125 million. BIM wishes to finance this project using its traditional debt-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total flotation cost?

The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because:

The acronym APV stands for:

A loan of $10,000 is issued at 15% interest. Interest on the loan is to be repaid annually for 5 years,and the non-amortized principal is due at the end of the fifth year. Calculate the NPV of the loan if the company's tax rate is 34%.

Non-market or subsidized financing ________ the APV ___________.

A firm has a total value of $500,000 and debt valued at $300,000. What is the weighted average cost of capital if the after tax cost of debt is 9% and the cost of equity is 14%?