Question 1

Which of the following is NOT a step in the adjusted present value method?

Accepted Answer

A) Deducting costs arising from market imperfections 
B) Calculating the unlevered value of the project 
C) Calculating the after-tax WACC 
D) Calculating the value of the interest tax shield 
A) Deducting costs arising from market imperfections 
B) Calculating the unlevered value of the project 
C) Calculating the after-tax WACC 
D) Calculating the value of the interest tax shield

Question 2

Suppose that to fund this new project,Aardvark borrows $150 with the principal to be paid in three equal installments at the end each year.Calculate the The levered value of Aardvark's new project.

Accepted Answer

r_U = @#IMG-DLM& r_E + @#IMG-DLM& r_D r_U = @#IMG-DLM& _.12 + @#IMG-DLM& .07=

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   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 present value of the interest tax shield provided by Omicron's new project.

Accepted Answer

r_wacc = @#IMG-DLM& r_E + @#IMG-DLM& r_D(1 - τ_c),where D = net debt

Question 4

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   Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt to equity ratio.
-Omicron's Unlevered cost of capital is closest to:

Accepted Answer

A) 8.75% 
B) 7.10% 
C) 9.60% 
D) 7.50% 
A) 8.75% 
B) 7.10% 
C) 9.60% 
D) 7.50%

Question 5

The unlevered cost of capital for Antelope Incorporated is closest to:

Accepted Answer

A) 10.3% 
B) 9.9% 
C) 10.1% 
D) 9.5% 
A) 10.3% 
B) 9.9% 
C) 10.1% 
D) 9.5%

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) In the real world,specific projects should differ only slightly from the average investment made by the firm. 
B) We can estimate rU for a new project by looking at single-division firms that have similar business risks. 
C) The project's equity cost of capital depends on its unlevered cost of capital,rU,and the debt-equity ratio of the incremental financing that will be put in place to support the project. 
D) Projects may vary in the amount of leverage they will support - for example,acquisitions of real estate or capital equipment are often highly levered,whereas investments in intellectual property are not. 
A) In the real world,specific projects should differ only slightly from the average investment made by the firm. 
B) We can estimate rU for a new project by looking at single-division firms that have similar business risks. 
C) The project's equity cost of capital depends on its unlevered cost of capital,rU,and the debt-equity ratio of the incremental financing that will be put in place to support the project. 
D) Projects may vary in the amount of leverage they will support - for example,acquisitions of real estate or capital equipment are often highly levered,whereas investments in intellectual property are not.

Question 7

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 there after.Rose currently maintains a debt to equity ratio of 1,its marginal tax rate is 40%,its cost of debt rS1U1B1DS1U1B0 is 6%,and its cost of equity rS1U1B1ES1U1B0 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:

Accepted Answer

A) $5 million 
B) $100 million 
C) -$100 million 
D) -$50 million 
A) $5 million 
B) $100 million 
C) -$100 million 
D) -$50 million

Question 8

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 marginal tax rate of 35%,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 9

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 10

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

Accepted Answer

A) WACC method 
B) APV method 
C) FTE method 
D) All of the above are used in capital budgeting decisions. 
A) WACC method 
B) APV method 
C) FTE method 
D) All of the above are used in capital budgeting decisions.

Question 11

Galt's WACC is closest to:

Accepted Answer

A) 6.0% 
B) 9.6% 
C) 10.3% 
D) 10.7% 
A) 6.0% 
B) 9.6% 
C) 10.3% 
D) 10.7%

Question 12

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 13

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   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 14

Suppose that to fund this new project,Aardvark borrows $150 with the principal to be paid in three equal installments at the end each year.Calculate the present value of Aardvark's interest tax shield.

Accepted Answer

PV(interest tax shie

Question 15

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:

Accepted Answer

A) $100 million 
B) $120 million 
C) $124 million 
D) $115 million 
A) $100 million 
B) $120 million 
C) $124 million 
D) $115 million

Question 16

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 17

Which of the following questions is FALSE?

Accepted Answer

A) With perfect capital markets,all securities are fairly priced and issuing securities is a zero-NPV transaction. 
B) The fees associated with the financing of the project are independent of the project's required cash flows and should be ignored when calculating the NPV of the project. 
C) When a firm borrows funds,a mispricing scenario arises if the interest rate charged differs from the rate that is appropriate given the actual risk of the loan. 
D) The WACC,APV,and FTE methods determine the value of an investment incorporating the tax shields associated with leverage. 
A) With perfect capital markets,all securities are fairly priced and issuing securities is a zero-NPV transaction. 
B) The fees associated with the financing of the project are independent of the project's required cash flows and should be ignored when calculating the NPV of the project. 
C) When a firm borrows funds,a mispricing scenario arises if the interest rate charged differs from the rate that is appropriate given the actual risk of the loan. 
D) The WACC,APV,and FTE methods determine the value of an investment incorporating the tax shields associated with leverage.

Question 18

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 19

The Free Cash Flow-to-Equity (FCFE)for the acquisition in year 1 is closest to:

Accepted Answer

A) $4.7 million 
B) $6.5 million 
C) $8.3 million 
D) $6.8 million 
A) $4.7 million 
B) $6.5 million 
C) $8.3 million 
D) $6.8 million

Question 20

If Galt's debt cost of capital is 6%,then Galt's equity cost of capital is closest to:

Accepted Answer

A) 11.2% 
B) 12.0% 
C) 14.8% 
D) 15.2% 
A) 11.2% 
B) 12.0% 
C) 14.8% 
D) 15.2%

Exam 18: Capital Budgeting and Valuation With Leverage

Which of the following is NOT a step in the adjusted present value method?

Suppose that to fund this new project,Aardvark borrows $150 with the principal to be paid in three equal installments at the end each year.Calculate the The levered value of Aardvark's new project.

The unlevered cost of capital for Antelope Incorporated is closest to:

Which of the following statements is FALSE?

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

Galt's WACC is closest to:

Which of the following statements is FALSE?

Suppose that to fund this new project,Aardvark borrows $150 with the principal to be paid in three equal installments at the end each year.Calculate the present value of Aardvark's interest tax shield.

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:

Consider the following equation: Rwacc = RE + RD(1 - τc) The term E in this equation is:

Which of the following questions is FALSE?

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

The Free Cash Flow-to-Equity (FCFE)for the acquisition in year 1 is closest to:

If Galt's debt cost of capital is 6%,then Galt's equity cost of capital is closest to:

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

Consider the following equation: R_wacc = R_E + R_D(1 - τ_c) The term E in this equation is: