Question 1

Flotation costs:

Accepted Answer

A) are amortized using a declining-balance method over the life of the loan. 
B) are amortized using the straight-line method over the life of the loan. 
C) are deducted as a business expense in the year incurred. 
D) cannot be deducted as a business expense. 
E) are deducted as a business expense at the time the loan is repaid in full. 
A) are amortized using a declining-balance method over the life of the loan. 
B) are amortized using the straight-line method over the life of the loan. 
C) are deducted as a business expense in the year incurred. 
D) cannot be deducted as a business expense. 
E) are deducted as a business expense at the time the loan is repaid in full.

Question 2

NDS Industries is evaluating a project with an initial investment at Time 0 of $640,000.The present value of the levered cash flows is $729,400 and the net present value of the project is $157,000.Using the flow-to-equity method of valuation determine the amount borrowed.

Accepted Answer

A) $89,400 
B) $246,400 
C) $67,600 
D) $54,300 
E) $64,000 
A) $89,400 
B) $246,400 
C) $67,600 
D) $54,300 
E) $64,000

Question 3

Kelso's is valued at $5.8 million,has riskless debt of $2.3 million outstanding,and has an equity beta of 1.81.What is the asset beta if there are no taxes?

Accepted Answer

A) 1.11 
B) 1.86 
C) 1.15 
D) 1.09 
E) 1.71 
A) 1.11 
B) 1.86 
C) 1.15 
D) 1.09 
E) 1.71

Question 4

Webster's latest project has an initial cost of $1.23 million and unlevered perpetual cash flows of $238,000.The firm has a debt-equity ratio of .42,a pretax cost of debt of 7.6 percent,a cost of equity of 13.3 percent,and a tax rate of 21 percent.What is the NPV of the project?

Accepted Answer

A) $864,010 
B) $887,982 
C) $906,056 
D) $909,411 
E) $892,020 
A) $864,010 
B) $887,982 
C) $906,056 
D) $909,411 
E) $892,020

Question 5

The appropriate cost of debt to the firm is the:

Accepted Answer

A) pretax market cost of debt. 
B) levered equity rate. 
C) aftertax market borrowing rate. 
D) pretax coupon rate. 
E) aftertax coupon rate. 
A) pretax market cost of debt. 
B) levered equity rate. 
C) aftertax market borrowing rate. 
D) pretax coupon rate. 
E) aftertax coupon rate.

Question 6

Vargo's has a target debt-to-value ratio of .6.The pretax cost of debt is 8.4 percent,the tax rate is 21 percent,and the unlevered cost of equity 13.2 percent.A project the firm is considering has a cash flow to the levered equityholders of $48,700 and an initial unborrowed cost of $216,000.What is the NPV of the project?

Accepted Answer

A) $41,836 
B) $48,208 
C) $62,342 
D) $61,003 
E) $38,367 
A) $41,836 
B) $48,208 
C) $62,342 
D) $61,003 
E) $38,367

Question 7

The APV method is least useful in which one of these situations?

Accepted Answer

A) A leveraged buyout 
B) A project involving interest subsidies 
C) A project based on a target debt-to-value ratio 
D) A project with flotation costs 
E) A lease-versus-purchase decision 
A) A leveraged buyout 
B) A project involving interest subsidies 
C) A project based on a target debt-to-value ratio 
D) A project with flotation costs 
E) A lease-versus-purchase decision

Question 8

The adjusted present value method (APV),the flow to equity (FTE)method,and the weighted average cost of capital (WACC)method produce equivalent results,but each can have difficulties making computation impossible at times.Given this,which one of these is a correct statement?

Accepted Answer

A) The WACC method is preferred when evaluating a leveraged buyout. 
B) The APV method is the most commonly used method in actual practice. 
C) Use the FTE method when the level of debt is known over a project's life. 
D) Use the WACC method when the level of debt is known over a project's life. 
E) The WACC method is appropriate when the target debt-to-value ratio applies over a project's life. 
A) The WACC method is preferred when evaluating a leveraged buyout. 
B) The APV method is the most commonly used method in actual practice. 
C) Use the FTE method when the level of debt is known over a project's life. 
D) Use the WACC method when the level of debt is known over a project's life. 
E) The WACC method is appropriate when the target debt-to-value ratio applies over a project's life.

Question 9

Beau Markets has a beta of 1.12,a cost of debt of 8.6 percent,and a debt-to-value ratio of .6.The current risk-free rate is 3.22 percent and the market rate of return is 14.47 percent.What is the company's cost of equity capital?

Accepted Answer

A) 12.97 percent 
B) 10.95 percent 
C) 15.82 percent 
D) 11.49 percent 
E) 13.96 percent 
A) 12.97 percent 
B) 10.95 percent 
C) 15.82 percent 
D) 11.49 percent 
E) 13.96 percent

Question 10

Which one of these statements is correct?

Accepted Answer

A) Flotation costs increase the value of RS. 
B) The weighted average cost of capital is equal to B/S(RS)(1 − Tc). 
C) The discount rate for levered equity is unaffected by the debt-equity ratio. 
D) The cost of equity for an all-equity firm is less than the cost of equity for a levered firm. 
E) The cost of levered equity is indirectly related to beta. 
A) Flotation costs increase the value of RS. 
B) The weighted average cost of capital is equal to B/S(RS)(1 − Tc). 
C) The discount rate for levered equity is unaffected by the debt-equity ratio. 
D) The cost of equity for an all-equity firm is less than the cost of equity for a levered firm. 
E) The cost of levered equity is indirectly related to beta.

Question 11

In order to value a project which is not scale enhancing you typically need to:

Accepted Answer

A) calculate the equity cost of capital using the risk-adjusted beta of another firm. 
B) double the firm's beta value when computing the project WACC. 
C) apply the firm's current WACC to the project's cash flows. 
D) discount the project's cash flows using the market rate of return since the project will diversify the firm's operations. 
E) replace the risk-free rate with the market rate of return when computing the project's discount rate. 
A) calculate the equity cost of capital using the risk-adjusted beta of another firm. 
B) double the firm's beta value when computing the project WACC. 
C) apply the firm's current WACC to the project's cash flows. 
D) discount the project's cash flows using the market rate of return since the project will diversify the firm's operations. 
E) replace the risk-free rate with the market rate of return when computing the project's discount rate.

Question 12

The term (RBB)represents the:

Accepted Answer

A) pretax interest payment. 
B) pretax cost of equity dividends. 
C) aftertax cost of debt. 
D) average pretax cost of equity. 
E) weighted average cost of capital. 
A) pretax interest payment. 
B) pretax cost of equity dividends. 
C) aftertax cost of debt. 
D) average pretax cost of equity. 
E) weighted average cost of capital.

Question 13

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 interweaving is most apt to result in:

Accepted Answer

A) firms rejecting positive NPV,all-equity projects because changing to a capital structure with debt will always create negative net present values. 
B) firms foregoing project analysis and just making decisions at random. 
C) corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing a project. 
D) firms accepting some negative NPV all-equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV. 
E) firms never changing their capital structure because all capital budgeting decisions will be overridden by capital structure decisions. 
A) firms rejecting positive NPV,all-equity projects because changing to a capital structure with debt will always create negative net present values. 
B) firms foregoing project analysis and just making decisions at random. 
C) corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing a project. 
D) firms accepting some negative NPV all-equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV. 
E) firms never changing their capital structure because all capital budgeting decisions will be overridden by capital structure decisions.

Question 14

Discuss the adjusted present value,the flow to equity,and the weighted average cost of capital methods of capital budgeting with leverage and the guidelines for using each method.

Accepted Answer

The adjusted present value is defined as

Question 15

TTC is planning to raise $3.25 million for three years at an interest rate of 7.35 percent to finance their expansion.The Alban County Board of Commissioners has just offered the firm the $3.25 million they need at 5.25 percent if the firm builds in Alban County,pays the interest annually,and repays the principal at the end of three years.What is the net present value of the loan to TTC if the firm's tax rate is 21 percent and it accepts the county's offer?

Accepted Answer

A) $293,651 
B) $212,100 
C) $271,405 
D) $186,416 
E) $346,090 
A) $293,651 
B) $212,100 
C) $271,405 
D) $186,416 
E) $346,090

Question 16

Explain why the flow to equity approach uses levered,not unlevered,cash flows.

Accepted Answer

The flow to equity approach discounts th

Question 17

The APV method is comprised of the all-equity NPV of a project plus the NPV of financing effects.The four financing side effects are:

Accepted Answer

A) tax subsidy of dividends,cost of issuing new securities,subsidy of financial distress,and cost of debt financing. 
B) cost of issuing new securities,cost of financial distress,tax subsidy of debt,and other subsidies to debt financing. 
C) cost of issuing new securities,cost of financial distress,tax subsidy of dividends,and cost of debt financing. 
D) subsidy of financial distress,tax subsidy of debt,cost of other debt financing,and cost of issuing new securities. 
E) cost of financial distress,tax subsidy of debt,increased cost of equity capital,and cost of issuing new securities. 
A) tax subsidy of dividends,cost of issuing new securities,subsidy of financial distress,and cost of debt financing. 
B) cost of issuing new securities,cost of financial distress,tax subsidy of debt,and other subsidies to debt financing. 
C) cost of issuing new securities,cost of financial distress,tax subsidy of dividends,and cost of debt financing. 
D) subsidy of financial distress,tax subsidy of debt,cost of other debt financing,and cost of issuing new securities. 
E) cost of financial distress,tax subsidy of debt,increased cost of equity capital,and cost of issuing new securities.

Question 18

A project has an initial cost of $480,000,projected revenue of $311,500,cash costs of $214,650,an unlimited life,a tax rate of 21 percent,and a weighted average cost of capital of 13.8 percent.What is the net present value of the project?

Accepted Answer

A) $24,411 
B) $115,494 
C) $100,003 
D) $66,497 
E) $74,431 
A) $24,411 
B) $115,494 
C) $100,003 
D) $66,497 
E) $74,431

Question 19

A project has an unlevered NPV of $1.5 million.To finance the project,debt is being 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 being issued at the market interest rate of 10 percent paid annually,with principal repaid in a lump sum at the end of the fifth year.If the firm's tax rate is 21 percent,calculate the project's APV.

Accepted Answer

A) $2,441,107 
B) $1,494,028 
C) $2,384,312 
D) $2,245,618 
E) $1,909,417 
A) $2,441,107 
B) $1,494,028 
C) $2,384,312 
D) $2,245,618 
E) $1,909,417

Question 20

The flow-to-equity approach to capital budgeting involves all the following except:

Accepted Answer

A) calculating the levered cost of equity. 
B) determining the amount of the investment that is not borrowed. 
C) computing the PV of the cash flows using the cost of equity for an all-equity firm. 
D) discounting the levered cash flows using the levered cost of equity. 
E) computing the project's NPV. 
A) calculating the levered cost of equity. 
B) determining the amount of the investment that is not borrowed. 
C) computing the PV of the cash flows using the cost of equity for an all-equity firm. 
D) discounting the levered cash flows using the levered cost of equity. 
E) computing the project's NPV.

Exam 18: Valuation and Capital Budgeting for the Levered Firm

Flotation costs:

NDS Industries is evaluating a project with an initial investment at Time 0 of $640,000.The present value of the levered cash flows is $729,400 and the net present value of the project is $157,000.Using the flow-to-equity method of valuation determine the amount borrowed.

Kelso's is valued at $5.8 million,has riskless debt of $2.3 million outstanding,and has an equity beta of 1.81.What is the asset beta if there are no taxes?

Webster's latest project has an initial cost of $1.23 million and unlevered perpetual cash flows of $238,000.The firm has a debt-equity ratio of .42,a pretax cost of debt of 7.6 percent,a cost of equity of 13.3 percent,and a tax rate of 21 percent.What is the NPV of the project?

The appropriate cost of debt to the firm is the:

The APV method is least useful in which one of these situations?

The adjusted present value method (APV),the flow to equity (FTE)method,and the weighted average cost of capital (WACC)method produce equivalent results,but each can have difficulties making computation impossible at times.Given this,which one of these is a correct statement?

Beau Markets has a beta of 1.12,a cost of debt of 8.6 percent,and a debt-to-value ratio of .6.The current risk-free rate is 3.22 percent and the market rate of return is 14.47 percent.What is the company's cost of equity capital?

Which one of these statements is correct?

In order to value a project which is not scale enhancing you typically need to:

The term (RBB)represents the:

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 interweaving is most apt to result in:

Discuss the adjusted present value,the flow to equity,and the weighted average cost of capital methods of capital budgeting with leverage and the guidelines for using each method.

Explain why the flow to equity approach uses levered,not unlevered,cash flows.

The APV method is comprised of the all-equity NPV of a project plus the NPV of financing effects.The four financing side effects are:

A project has an initial cost of $480,000,projected revenue of $311,500,cash costs of $214,650,an unlimited life,a tax rate of 21 percent,and a weighted average cost of capital of 13.8 percent.What is the net present value of the project?

The flow-to-equity approach to capital budgeting involves all the following except:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

Filters

The term (R_BB)represents the: