Exam 18: Valuation and Capital Budgeting for the Levered Firm

Jelco has a target debt-to-value ratio of .55.The pretax cost of debt is 8.6 percent,the assumed tax rate is 24 percent,and the unlevered cost of equity 13.4 percent.What is the target cost of equity?

Banisters is valued at $8.6 million and has debt of $2.1 million outstanding.The unlevered firm beta is 1.72,and the tax rate is 21 percent.What is the levered equity beta?

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

Winston's has a beta of 1.08 and a cost of debt of 8 percent.The current risk-free rate is 3.2 percent and the market rate of return is 11.47 percent.What is the company's cost of equity capital?

Simpson Enterprises is considering a new project with revenue of $325,000 for the indefinite future.Cash costs are 63 percent of the revenue.The initial cost of the investment is $425,000.The tax rate is 21 percent and the unlevered cost of equity is 17 percent.What is the net present value of the project?

The beta of debt is commonly assumed to be:

Blue Water Boats is considering a new project with perpetual revenue of $435,000,cash costs of $310,000,and a tax rate of 21 percent.The firm plans to issue $250,000 of debt at an interest rate of 7.3 percent to help finance the initial project cost of $475,000.The levered discount rate is 16.7 percent.What is the net present value of this project?

The Boat Company has a capital structure of 30 percent riskless debt and 70 percent equity.The assumed tax rate is 23 percent.If the asset beta is .9,what is the equity beta?

The cost of equity for an all-equity firm is designated as:

A firm currently has debt outstanding with a coupon rate of 7 percent.The firm is obtaining subsidized financing for a new project at a rate of 5.5 percent.The current market rate is 6.8 percent and the firm's tax rate is 21 percent.What discount rate should be used to compute the NPV of the loan?

Webster Corp.is planning to build a new shipping depot.The initial cost of the investment is $1.18 million.Efficiencies from the new depot are expected to reduce aftertax annual costs by $105,000 forever.The corporation has a total value of $62.4 million and has outstanding debt of $38.7 million.What is the NPV of the project if the firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent?

A global conglomerate has a debt beta of zero.If the cost of equity is 12.23 percent,and the risk-free rate is 4.36 percent,what is the firm's pretax cost of debt?

Kelly Industries is given the opportunity to raise $5 million in debt for four years through a local government subsidized program.While Kelly would normally be required to pay 12 percent on its debt issues,the Hampton County program sets the rate at 9 percent.What is the NPV of this subsidized loan? Ignore taxes.

Joshua Industries is considering a new project with revenue of $478,000 for the indefinite future.Cash costs are 68 percent of the revenue.The initial cost of the investment is $685,000.The tax rate is 21 percent and the unlevered cost of equity is 14.2 percent.The firm is financing $200,000 of the project cost with debt.What is the adjusted present value of the project?

To calculate the adjusted present value,you should:

Given the all-equity cost of capital,the cost of levered equity can be computed as:

The acronym APV stands for:

Subsidized financing ________ the APV ________.

Hilltop Paving has a levered equity cost of capital of 14.92 percent.The debt-to-value ratio is .4,the assumed tax rate is 23 percent,and the pretax cost of debt is 7.2 percent.What is the estimated unlevered cost of equity?

Explain how flotation costs affect the analysis of a levered project.