Question 1

The NPV of this project using the WACC method is closest to:

Accepted Answer

A) $10 million 
B) $13 million 
C) $42 million 
D) $71 million 
A) $10 million 
B) $13 million 
C) $42 million 
D) $71 million

Question 2

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.
-Rose's unlevered cost of capital is closest to:

Accepted Answer

A) 8.0% 
B) 7.5% 
C) 7.0% 
D) 9.0% 
A) 8.0% 
B) 7.5% 
C) 7.0% 
D) 9.0%

Question 3

The weighted average cost of capital for "Meenie" is closest to:

Accepted Answer

A) 10.5% 
B) 7.4% 
C) 10.0% 
D) 8.8% 
A) 10.5% 
B) 7.4% 
C) 10.0% 
D) 8.8%

Question 4

Nielson's share price is closest to:

Accepted Answer

A) $20.80 
B) $24.40 
C) $27.50 
D) $31.20 
A) $20.80 
B) $24.40 
C) $27.50 
D) $31.20

Question 5

The Debt Capacity for Omicron's new project in year 1 is closest to:

Accepted Answer

A) $38.75 
B) $48.25 
C) $50.25 
D) $58.00 
A) $38.75 
B) $48.25 
C) $50.25 
D) $58.00

Question 6

Consider the following equation:
Dt = d ×

The term d in this equation is:

Accepted Answer

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

Question 7

Consider the following equation for the Project WACC with a fixed debt schedule:
Rwacc = rU - dτc[rD + f(rU - rD)]
The term f in this equations represents:

Accepted Answer

A) the annual adjustment percentage to the amount of debt. 
B) a measure of the permanence of the debt level. 
C) the dollar amount of debt outstanding. 
D) the debt-to-value ratio. 
A) the annual adjustment percentage to the amount of debt. 
B) a measure of the permanence of the debt level. 
C) the dollar amount of debt outstanding. 
D) the debt-to-value ratio.

Question 8

If KT expects to maintain a debt to equity ratio for this project of .6 then KT's project based WACC,rwacc,for this project is closest to:

Accepted Answer

A) 10.5% 
B) 11.1% 
C) 9.6% 
D) 10.8% 
A) 10.5% 
B) 11.1% 
C) 9.6% 
D) 10.8%

Question 9

The unlevered value of Omicron's new project is closest to:

Accepted Answer

A) $96 
B) $124 
C) $126 
D) $25 
A) $96 
B) $124 
C) $126 
D) $25

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) Rather than set debt according to a target debt-equity ratio or interest coverage level,a firm may adjust its debt according to a fixed schedule that is known in advance. 
B) When we relax the assumption of a constant debt-equity ratio,the equity cost of capital and WACC for a project will change over time as the debt-equity ratio changes. 
C) When we relax the assumption of a constant debt-equity ratio,the APV and FTE methods are difficult to implement. 
D) If a firm is using leverage to shield income from corporate taxes,then it will adjust its debt level so that its interest expenses grow with its earnings. 
A) Rather than set debt according to a target debt-equity ratio or interest coverage level,a firm may adjust its debt according to a fixed schedule that is known in advance. 
B) When we relax the assumption of a constant debt-equity ratio,the equity cost of capital and WACC for a project will change over time as the debt-equity ratio changes. 
C) When we relax the assumption of a constant debt-equity ratio,the APV and FTE methods are difficult to implement. 
D) If a firm is using leverage to shield income from corporate taxes,then it will adjust its debt level so that its interest expenses grow with its earnings.

Question 11

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

The Debt Capacity for Omicron's new project in year 0 is closest to:

Accepted Answer

A) $38.75 
B) $75.50 
C) $50.25 
D) $10.25 
A) $38.75 
B) $75.50 
C) $50.25 
D) $10.25

Question 13

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 weighted average cost of capital is closest to:

Accepted Answer

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

Question 14

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 marginal corporate tax rate is 35%.
-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 15

The unlevered cost of capital for "Moe" is closest to:

Accepted Answer

A) 8.25% 
B) 7.75% 
C) 8.50% 
D) 10.00% 
A) 8.25% 
B) 7.75% 
C) 8.50% 
D) 10.00%

Question 16

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.
-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 equal to?

Accepted Answer

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

Question 17

The NPV for Iota's new project is closest to:

Accepted Answer

A) $25.25 
B) $13.25 
C) $9.00 
D) $18.50 
A) $25.25 
B) $13.25 
C) $9.00 
D) $18.50

Question 18

Assuming that to fund the investment Taggart will take on $250 million in permanent debt and assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue,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 19

Assume that to fund the investment Taggart will take on $150 million in permanent debt with the remainder of the investment funded by a cut in dividends.Assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue,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 20

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...

Exam 18: Capital Budgeting and Valuation With Leverage

The NPV of this project using the WACC method is closest to:

The weighted average cost of capital for "Meenie" is closest to:

Nielson's share price is closest to:

The Debt Capacity for Omicron's new project in year 1 is closest to:

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

Consider the following equation for the Project WACC with a fixed debt schedule: Rwacc = rU - dτc[rD + f(rU - rD)] The term f in this equations represents:

If KT expects to maintain a debt to equity ratio for this project of .6 then KT's project based WACC,rwacc,for this project is closest to:

The unlevered value of Omicron's new project is closest to:

Which of the following statements is FALSE?

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:

The Debt Capacity for Omicron's new project in year 0 is closest to:

The unlevered cost of capital for "Moe" is closest to:

The NPV for Iota's new project is closest to:

Assuming that to fund the investment Taggart will take on $250 million in permanent debt and assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue,the NPV of Taggart's new rail line is closest to:

Assume that to fund the investment Taggart will take on $150 million in permanent debt with the remainder of the investment funded by a cut in dividends.Assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue,the NPV of Taggart's new rail line 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: D^{t = d ×} The term d in this equation is:

Consider the following equation for the Project WACC with a fixed debt schedule: R_wacc = r_U - dτ_c[rD + f(r_U - r_D)] The term f in this equations represents:

If KT expects to maintain a debt to equity ratio for this project of .6 then KT's project based WACC,r_wacc,for this project is closest to:

If KT expects to maintain a debt to equity ratio for this project of .6 then KT's equity cost of capital,r_E,for this project is closest to: