Question 1

When using the APV methodology,what is the NPV of the depreciation tax shield?

Accepted Answer

A) $32,051.52 
B) $25,777.35 
C) $22,794.65 
D) $97,152.98 
E) None of the above 
A) $32,051.52 
B) $25,777.35 
C) $22,794.65 
D) $97,152.98 
E) None of the above B

Question 2

Using the flow to equity methodology,what is the value of the equity claim?

Accepted Answer

A) -$1,540,000 
B) $446,570,866.00 
C) $36,580,767.55 
D) $470,953,393.70 
E) $30,716,236.13 The firm will partially finance the project with an 8% interest-only 4-year loan. 
A) -$1,540,000 
B) $446,570,866.00 
C) $36,580,767.55 
D) $470,953,393.70 
E) $30,716,236.13 The firm will partially finance the project with an 8% interest-only 4-year loan. E

Question 3

The required return on equity for an all-equity firm is 10.0%.They currently have a beta of one and the risk-free rate is 5% and the market risk premium is 5%.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the beta if this firm changes capital structure.

Accepted Answer

A) 1.12 
B) 1 
C) 7.4% 
D) None of the above 
A) 1.12 
B) 1 
C) 7.4% 
D) None of the above B

Question 4

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of iS1U1B1£S1U1B0 = 15%. The firm's local cost of capital is iS1U1B1€S1U1B0 = 10%
The project costs £1,000 and will return £1,150 at the end of one year.
The current exchange rate is €2.00 = £1.00
Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: $$\begin{array} { l } 
S _ { 1 } ( € \mid £ ) = € 2.20 \text { per } £ \
S _ { 1 } ( € \mid £ ) = € 1.80 \text { per } £
\end{array}$$ Following revaluation, the exchange rate is expected to remain steady for at least another year.
-Using your results to the last question,make a recommendation vis-à-vis when to undertake the project.

Accepted Answer

The answer of A French firm is considering a one-year...

Question 5

What is the levered after-tax incremental cash flow for year 4?

Accepted Answer

A) -$281,704,000 
B) $465,152,000 
C) -$194,848,000 
D) $460,796,000 
E) None of the above The firm will partially finance the project with an 8% interest-only 4-year loan. 
A) -$281,704,000 
B) $465,152,000 
C) -$194,848,000 
D) $460,796,000 
E) None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 6

Consider the following international investment opportunity:   The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
-What is the euro-denominated IRR of this project?

Accepted Answer

The answer of Consider the following international investment opportunity: ...

Question 7

What is the unlevered after-tax incremental cash flow for year 0?

Accepted Answer

A) -$3,660,000 
B) -$5,100,000 
C) -$4,000,000 
D) -$4,010,000 
E) None of the above 
A) -$3,660,000 
B) -$5,100,000 
C) -$4,000,000 
D) -$4,010,000 
E) None of the above

Question 8

Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.

Accepted Answer

The answer of Find the euro-zone cost of capital to...

Question 9

What is the NPV of the U.S.-based project to the Irish firm?

Accepted Answer

The answer of What is the NPV of the U.S.-based...

Question 10

What is the euro-denominated IRR of this project?

Accepted Answer

The answer of What is the euro-denominated IRR of this...

Question 11

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of iS1U1B1£S1U1B0 = 15%. The firm's local cost of capital is iS1U1B1€S1U1B0 = 10%
The project costs £1,000 and will return £1,150 at the end of one year.
The current exchange rate is €2.00 = £1.00
Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: $$\begin{array} { l } 
S _ { 1 } ( € \mid £ ) = € 2.20 \text { per } £ \
S _ { 1 } ( € \mid £ ) = € 1.80 \text { per } £
\end{array}$$ Following revaluation, the exchange rate is expected to remain steady for at least another year.
-Find the IRR in euro for the French firm if they wait one year to undertake the project after the exchange rate rises to S1(€|£)= €2.20 per £.

Accepted Answer

Question 12

The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10%; inflation over the next three years is 3% per year in the U.S.and 2% per year in Japan.Calculate the dollar NPV of this project.   I did not round my intermediate steps,if you did,select the answer closest to yours.

Accepted Answer

A) $267,181.87 
B) $14,176.67 
C) $2,536.49 
D) $2,137.46 
E) None of the above 
A) $267,181.87 
B) $14,176.67 
C) $2,536.49 
D) $2,137.46 
E) None of the above

Question 13

The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year. The expansion, including the cost of the land, will cost $500,000. The current price of gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 * (1.06). Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent.
Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the latter event, the price of gold would increase to at least $460 per ounce. The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $25,000.
-Compute the NPV at the two possible prices of gold.

Accepted Answer

The answer of The Strik-it-Rich Gold Mining Company is contemplating...

Question 14

What is the NPV of the project using the WACC methodology?

Accepted Answer

A) $49,613.03 
B) $58,028.68 
C) $102,727.55 
D) $315,666.16 
E) None of the above 
A) $49,613.03 
B) $58,028.68 
C) $102,727.55 
D) $315,666.16 
E) None of the above

Question 15

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8%.What is the APV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

Accepted Answer

A) $406,023.10 
B) $840,797 
C) $64,157.38 
D) $20,659.77 
E) None of the other answers are within $100 of my answer 
A) $406,023.10 
B) $840,797 
C) $64,157.38 
D) $20,659.77 
E) None of the other answers are within $100 of my answer

Question 16

Capital budgeting analysis is very important,because it

Accepted Answer

A) involves, usually expensive, investments in capital assets. 
B) has to do with the productive capacity of a firm. 
C) will determine how competitive and profitable a firm will be. 
D) all of the above
Tiger Towers, Inc.is considering an expansion of their existing business, student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 offices suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs, excluding depreciation, are $75,000 per year.The project will require a $10,000 investment in net working capital. $$\begin{aligned}
r _ { \text {debt } } & = 10.0 \% & & r _ { \text {WACC } } = 11.20 \% & & \frac { D } { E } = 3 \
r _ { \text {asset } } & = 15.0 \% & & \text { tax rate } = 34 \% . & & \
r _ { \text {equity } } & = 24.9 \% & r _ { \text {free } } = 2 \% & &
\end{aligned}$$ 
A) involves, usually expensive, investments in capital assets. 
B) has to do with the productive capacity of a firm. 
C) will determine how competitive and profitable a firm will be. 
D) all of the above
Tiger Towers, Inc.is considering an expansion of their existing business, student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 offices suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs, excluding depreciation, are $75,000 per year.The project will require a $10,000 investment in net working capital. $$\begin{aligned}
r _ { \text {debt } } & = 10.0 \% & & r _ { \text {WACC } } = 11.20 \% & & \frac { D } { E } = 3 \
r _ { \text {asset } } & = 15.0 \% & & \text { tax rate } = 34 \% . & & \
r _ { \text {equity } } & = 24.9 \% & r _ { \text {free } } = 2 \% & &
\end{aligned}$$

Question 17

The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year. The expansion, including the cost of the land, will cost $500,000. The current price of gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 * (1.06). Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent.
Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the latter event, the price of gold would increase to at least $460 per ounce. The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $25,000.
-Compute the NPV at the current price of gold.Hint: think of the gold mine as a perpetuity.

Accepted Answer

The answer of The Strik-it-Rich Gold Mining Company is contemplating...

Question 18

What is the unlevered after-tax incremental cash flow for year 2?

Accepted Answer

A) -$4,610 
B) $102,300 
C) $202,300 
D) $255,000 
E) None of the above 
A) -$4,610 
B) $102,300 
C) $202,300 
D) $255,000 
E) None of the above

Question 19

What is CF5 in dollars?

Accepted Answer

The answer of What is CF5 in dollars?...

Question 20

As of today,the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Accepted Answer

A) €1.00 = $1.5147 
B) €1.00 = $1.4854 
C) €1.00 = $0.6602 
D) $1.00 = €0.6602 
A) €1.00 = $1.5147 
B) €1.00 = $1.4854 
C) €1.00 = $0.6602 
D) $1.00 = €0.6602

When using the APV methodology,what is the NPV of the depreciation tax shield?

Using the flow to equity methodology,what is the value of the equity claim?

What is the levered after-tax incremental cash flow for year 4?

What is the unlevered after-tax incremental cash flow for year 0?

Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.

What is the NPV of the U.S.-based project to the Irish firm?

What is the euro-denominated IRR of this project?

The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10%; inflation over the next three years is 3% per year in the U.S.and 2% per year in Japan.Calculate the dollar NPV of this project. I did not round my intermediate steps,if you did,select the answer closest to yours.

What is the NPV of the project using the WACC methodology?

Capital budgeting analysis is very important,because it

What is the unlevered after-tax incremental cash flow for year 2?

What is CF5 in dollars?

As of today,the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

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Exam 18: International Capital Budgeting

When using the APV methodology,what is the NPV of the depreciation tax shield?

Using the flow to equity methodology,what is the value of the equity claim?

What is the levered after-tax incremental cash flow for year 4?

What is the unlevered after-tax incremental cash flow for year 0?

Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.

What is the NPV of the U.S.-based project to the Irish firm?

What is the euro-denominated IRR of this project?

The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10%; inflation over the next three years is 3% per year in the U.S.and 2% per year in Japan.Calculate the dollar NPV of this project. I did not round my intermediate steps,if you did,select the answer closest to yours.

What is the NPV of the project using the WACC methodology?

Capital budgeting analysis is very important,because it

What is the unlevered after-tax incremental cash flow for year 2?

What is CF5 in dollars?

As of today,the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters