Exam 21: Capital Budgeting and Valuation With Leverage

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 Armadillo Industries 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. -The unlevered value of Omicron's new project is closest to:

Suppose that to fund this new project,Aardvark borrows $120 million with the principal to be paid in three equal installments at the end each year.The levered value of Aardvark's new project is closest to:

Use the table for the question(s) below. Consider the information for the following four firms: -The weighted average cost of capital for "Eenie" is closest to:

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

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 debt capacity for Iota's new project in year 0 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 D in this equation is

Describe the key steps in the WACC valuation method.

In the flow-to-equity (FTE)valuation method,we explicitly calculate the free cash flow available to ________ taking into account all payments to and from ________.

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. -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.If this product line is of average risk and Luther plans to maintain a constant debt-equity ratio,what after-tax amount must it receive for the product line in order for the divestiture to be profitable?

The ________ for a project will depend on the characteristics of both the project and the firm.

Which of the following statements is false?

Suppose that to fund this new project,Aardvark borrows $150 million 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.

Describe three simplifying assumptions that we make in valuing a project.

The APV method is more complicated than the WACC method because we must compute two separate valuations: ________.

The three main methods of capital budgeting are

Consider the following equation: r_wacc = r_U - τ_cdr_D The term r_U in this equation is

Consider the following equation: D^{t = d ×} The term d in this equation is

Consider the following equation: D^{t = d ×} The term D^t in this equation is