Question 1

Which of the following statements is false?

Accepted Answer

A)  As a general rule, the WACC method is the easiest to use when the firm will maintain a fixed debt-to-value ratio over the life of the investment. 
B)  The FTE method is typically used only in complicated settings for which the values of other securities in the firm's capital structure or the interest tax shield are themselves difficult to determine. 
C)  For alternative leverage policies, the FTE method is usually the most straightforward approach. 
D)  When used consistently, the WACC, APV, and FTE methods produce the same valuation for the investment. 
A)  As a general rule, the WACC method is the easiest to use when the firm will maintain a fixed debt-to-value ratio over the life of the investment. 
B)  The FTE method is typically used only in complicated settings for which the values of other securities in the firm's capital structure or the interest tax shield are themselves difficult to determine. 
C)  For alternative leverage policies, the FTE method is usually the most straightforward approach. 
D)  When used consistently, the WACC, APV, and FTE methods produce the same valuation for the investment.

Question 2

Describe the key steps to determine the value of a levered investment using the APV method.

Accepted Answer

1.Determine the investment's value witho

Question 3

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 thereafter. 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.
-The Free Cash Flow to Equity (FCFE)for the acquisition in year 1 is closest to:

Accepted Answer

A)  $4.7 million 
B)  $6.5 million 
C)  $8.3 million 
D)  $6.8 million 
A)  $4.7 million 
B)  $6.5 million 
C)  $8.3 million 
D)  $6.8 million

Question 4

Use the information for the question(s) below.
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. This product line is of average risk and Luther plans to maintain a constant debt-equity ratio.
-The unlevered value of Luther's product line is closest to:

Accepted Answer

A)  $25 million 
B)  $60 million 
C)  $45 million 
D)  $40 million 
A)  $25 million 
B)  $60 million 
C)  $45 million 
D)  $40 million

Question 5

Use the table for the question(s) below.
Consider the information for the following four firms:
  
-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 6

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 thereafter. 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 7

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 interest tax shield provided by Omicron's new project in year 1 is closest to:

Accepted Answer

A)  $3.00 
B)  $1.05 
C)  $50.25 
D)  $17.60 
A)  $3.00 
B)  $1.05 
C)  $50.25 
D)  $17.60

Question 8

Which of the following statements is false?

Accepted Answer

A)  In the real world, specific projects should differ only slightly from the average investment made by the firm. 
B)  We can estimate rU for a new project by looking at single-division firms that have similar business risks. 
C)  The project's equity cost of capital depends on its unlevered cost of capital, rU, and the debt-equity ratio of the incremental financing that will be put in place to support the project. 
D)  Projects may vary in the amount of leverage they will support - for example, acquisitions of real estate or capital equipment are often highly levered, whereas investments in intellectual property are not. 
A)  In the real world, specific projects should differ only slightly from the average investment made by the firm. 
B)  We can estimate rU for a new project by looking at single-division firms that have similar business risks. 
C)  The project's equity cost of capital depends on its unlevered cost of capital, rU, and the debt-equity ratio of the incremental financing that will be put in place to support the project. 
D)  Projects may vary in the amount of leverage they will support - for example, acquisitions of real estate or capital equipment are often highly levered, whereas investments in intellectual property are not.

Question 9

The reason that the Air Transportation Safety and System Stabilization Act,which established the Air Transportation Stabilization Board (ATSB)in the United States of America,gives the U.S.carriers an advantage over Canadian carriers is because

Accepted Answer

A)  the act enables the U.S. carriers to obtain loans at the same level of interest rate as Canadian air carriers. 
B)  the act enables the U.S. carriers to obtain loans at a lower interest rate than they would without the guarantee. 
C)  the act enables the U.S. carriers to obtain loans at the higher level of interest rate as Canadian air carriers. 
D)  the act breaks the advantages of interest rate that Canadian carriers have enjoyed for many years. 
A)  the act enables the U.S. carriers to obtain loans at the same level of interest rate as Canadian air carriers. 
B)  the act enables the U.S. carriers to obtain loans at a lower interest rate than they would without the guarantee. 
C)  the act enables the U.S. carriers to obtain loans at the higher level of interest rate as Canadian air carriers. 
D)  the act breaks the advantages of interest rate that Canadian carriers have enjoyed for many years.

Question 10

When the firm keeps its interest payments to a target fraction of its FCF,we say it has a(n)________ interest coverage ratio.

Accepted Answer

A)  constant 
B)  average 
C)  variable 
D)  zero 
A)  constant 
B)  average 
C)  variable 
D)  zero

Question 11

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 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 12

Which of the following is NOT a step in valuation using the flow-to-equity method?

Accepted Answer

A)  Determine the equity cost of capital, rE. 
B)  Compute the equity value, E, by discounting the free cash flow-to-equity using the equity cost of capital. 
C)  Determine the free cash flow to equity of the investment. 
D)  Determine the before-tax cost of capital, rU. 
A)  Determine the equity cost of capital, rE. 
B)  Compute the equity value, E, by discounting the free cash flow-to-equity using the equity cost of capital. 
C)  Determine the free cash flow to equity of the investment. 
D)  Determine the before-tax cost of capital, rU.

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.
-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 14

The first step in the APV method is to calculate ________ using the project's cost of capital if it were financed ________ leverage.

Accepted Answer

A)  the market value of free cash flows; with 
B)  the future value of free cash flows; without 
C)  the present value of free cash flows; without 
D)  the book value of free cash flows; with 
A)  the market value of free cash flows; with 
B)  the future value of free cash flows; without 
C)  the present value of free cash flows; without 
D)  the book value of free cash flows; with

Which of the following statements is false?

Describe the key steps to determine the value of a levered investment using the APV method.

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

Which of the following statements is false?

The reason that the Air Transportation Safety and System Stabilization Act,which established the Air Transportation Stabilization Board (ATSB)in the United States of America,gives the U.S.carriers an advantage over Canadian carriers is because

When the firm keeps its interest payments to a target fraction of its FCF,we say it has a(n)________ interest coverage ratio.

Which of the following is NOT a step in valuation using the flow-to-equity method?

The first step in the APV method is to calculate using the project's cost of capital if it were financed leverage.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 21: Capital Budgeting and Valuation With Leverage

Which of the following statements is false?

Describe the key steps to determine the value of a levered investment using the APV method.

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

Which of the following statements is false?

The reason that the Air Transportation Safety and System Stabilization Act,which established the Air Transportation Stabilization Board (ATSB)in the United States of America,gives the U.S.carriers an advantage over Canadian carriers is because

When the firm keeps its interest payments to a target fraction of its FCF,we say it has a(n)________ interest coverage ratio.

Which of the following is NOT a step in valuation using the flow-to-equity method?

The first step in the APV method is to calculate ________ using the project's cost of capital if it were financed ________ leverage.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

The first step in the APV method is to calculate using the project's cost of capital if it were financed leverage.