Exam 21: Capital Budgeting and Valuation With Leverage

The WACC approach does not require knowledge of ________ tax rates.This fact is important because in practice,estimating the marginal tax rate of the ________ can be very difficult.

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 d in this equation represents

Which of the following statements is false?

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

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:

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 equation represents

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. -The debt capacity for Omicron's new project in year 2 is closest to:

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

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 debt capacity of Omicron's new project for years 0,1,and 2.

What are the three methods we can use to include the value of the interest tax shield in the capital budgeting decision?

Which of the following statements is false?

Use the information for the question(s) below. KT Enterprises is considering undertaking a new project. Based upon analysis of firms with similar projects, KT has determined that an unlevered cost of equity of 12% is suitable for their project. KT's marginal tax rate is 35%, its borrowing rate is 7%, and KT does not believe that its borrowing rate will change if the new project is accepted. -If KT expects to maintain a debt-to-equity ratio for this project of 1,then KT's equity cost of capital,r_E,for this project is closest to:

Which of the following statements is false?

Consider the following equation: r_wacc = r_E + r_D(1 - τ_c) The term r_E in this equation is

Which of the following statements is false?

Use the information for the question(s) below. KT Enterprises is considering undertaking a new project. Based upon analysis of firms with similar projects, KT has determined that an unlevered cost of equity of 12% is suitable for their project. KT's marginal tax rate is 35%, its borrowing rate is 7%, and KT does not believe that its borrowing rate will change if the new project is accepted. -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:

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: -The unlevered cost of capital for Anteater Enterprises is closest to:

Consider the following equation: r_wacc = r_E + r_D(1 - τ_c) The term E in this equation is

Consider the following equation: r_wacc = r_E + r_D(1 - τ_c) The term r_D(1 - τ_c)in this equation is

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