Question 1

Given are the following data: Cost of debt = rD = 6.0%; Cost of equity = rE = 12.1%; Marginal tax rate = 21%; and the firm has 50 percent debt and 50 percent equity. Calculate the after-tax weighted average cost of capital (WACC).

Accepted Answer

A) 8.42 percent 
B) 7.1 percent 
C) 9.0 percent 
D) 5.9 percent

Question 2

The flow-to-equity method uses:
I.cash flows to equity, after interest and after taxes;
II.the cost of equity capital as the discount rate;
III.the weighted average cost of capital for discount rate;
IV.after-tax cash flows without considering interest and dividend payments

Accepted Answer

A) I and II only 
B) II and III only 
C) I and III only 
D) II and IV only

Question 3

The Miles-Ezzell formula for the adjusted cost of capital assumes that

Accepted Answer

A) the firm rebalances its debt ratio only once per year. 
B) the project cash flow is a perpetuity. 
C) the project's risk is a carbon copy of the firm's risk. 
D) MM's Proposition I corrected for taxes holds (i.e., T* = T
C) .

Question 4

The MM formula for the adjusted cost of capital takes into consideration only the effect of the interest tax shield on permanent debt.

Accepted Answer

A) True 
 B)False

Question 5

The APV method includes the NPV of a project assuming all-equity financing and then adds in the NPV of financing effects. The financing effects are

Accepted Answer

A) tax subsidy of dividends, cost of issuing new securities, subsidies 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. 
C) cost of issuing new securities, cost of financial distress, tax subsidy of dividends, and cost of debt financing. 
D) subsidies of financial distress, tax subsidy of debt, cost of other debt financing, and cost of issuing new securities.

Question 6

A project costs $7 million and is expected to produce cash flows of $2 million per year for 10 years. The opportunity cost of capital is 16 percent. If the firm has to issue stock to undertake the project and issue costs are $0.5 million, what is the project's APV?

Accepted Answer

A) $9.67 million 
B) $2.17 million 
C) $1.67 million 
D) $0.67 million

Question 7

In the case of large international investments, the project might include
I.custom-tailored project financing;
II.special contracts with suppliers;
III.special contracts with customers;
IV.special arrangements with governments

Accepted Answer

A) I and II only 
B) I, II, and III only 
C) I, II, III, and IV 
D) IV only

Question 8

The APV method can be used for valuing entire businesses.

Accepted Answer

A) True 
 B)False

Question 9

Discuss the advantages and limitations of using the weighted average cost of capital as a discount rate to evaluate capital budgeting projects.

Accepted Answer

The answer of Discuss the advantages and limitations of using...

Question 10

Given are the following data for year 1:
Profit after taxes = $5 million; Depreciation = $2 million; Investment in fixed assets = $4 million; Investment net working capital = $1 million. Calculate the free cash flow (FCF)for year 1.

Accepted Answer

A) $7 million 
B) $3 million 
C) $11 million 
D) $2 million

Question 11

Enterprise zone subsidies, a government program that provides financial incentives to make investments in a specific location, increase APV.

Accepted Answer

A) True 
 B)False

Question 12

The flow to equity method provides an accurate estimate of the value of a firm if

Accepted Answer

A) the debt-equity ratio remains constant for the life of the firm. 
B) amount of debt remains constant for the life of the firm. 
C) free cash flows remain constant for the life of the firm. 
D) the firm's financial leverage changes significantly over the life of the firm.

Question 13

Generally, the imposition of government restrictions increases the APV of a project.

Accepted Answer

A) True 
 B)False

Question 14

When using the weighted average cost of capital (WACC)to discount cash flows from a project, we assume the following:
I.The project's risks are the same as those of the firm's other assets and remain so for the life of the project.
II.The project supports the same fraction of debt to value as the firm's overall capital structure, and that fraction remains constant for the life of the project.
III.The cash flows from the project occur in perpetuity.

Accepted Answer

A) I only 
B) II only 
C) I and II only 
D) I, II, and III

Question 15

A project costs $14 million and is expected to produce cash flows of $4 million per year for 15 years. The opportunity cost of capital is 20 percent. If the firm has to issue stock to undertake the project and issue costs are $1 million, what is the project's APV?

Accepted Answer

A) $3.7 million 
B) $4.5 million 
C) $4.7 million 
D) $3 million

Question 16

Consider the following data:
FCF1 = $20 million; FCF2 = $20 million; FCF3 = $20 million. Assume that free cash flow grows at a rate of 5 percent for year 4 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.

Accepted Answer

A) $300 million 
B) $261.57 million 
C) $213.53 million 
D) $238.69 million

Question 17

A firm finances itself with 30 percent debt, 60 percent common equity, and 10 percent preferred stock. The before-tax cost of debt is 5 percent, the firm's cost of common equity is 15 percent, and that of preferred stock is 10 percent. The marginal tax rate is 30 percent. What is the firm's weighted average cost of capital?

Accepted Answer

A) 10.05 percent 
B) 11.05 percent 
C) 12.50 percent 
D) 10.75 percent

Question 18

Government loan guarantees for firms may increase APV by reducing bankruptcy risk.

Accepted Answer

A) True 
 B)False

Question 19

When one uses the after-tax weighted average cost of capital (WACC)to value a levered firm, the interest tax shield is

Accepted Answer

A) not accounted for by the use of the WACC. 
B) considered by deducting the interest payment from the cash flows. 
C) automatically considered because the after-tax cost of debt is included within the WACC formula. 
D) capitalized by the levered cost of equity.

Question 20

A firm has a total market value of $10 million while its debt has a market value of $4 million. What is the after-tax weighted average cost of capital if the before-tax cost of debt is 10 percent, the cost of equity is 15 percent, and the tax rate is 21 percent? (Round to the nearest decimal place).

Accepted Answer

A) 13.0 percent 
B) 12.2 percent 
C) 8.8 percent 
D) 10.4 percent

Exam 19: Financing and Valuation

Given are the following data: Cost of debt = r_D = 6.0%; Cost of equity = r_E = 12.1%; Marginal tax rate = 21%; and the firm has 50 percent debt and 50 percent equity. Calculate the after-tax weighted average cost of capital (WACC) .

The flow-to-equity method uses: I.cash flows to equity, after interest and after taxes; II.the cost of equity capital as the discount rate; III.the weighted average cost of capital for discount rate; IV.after-tax cash flows without considering interest and dividend payments

The Miles-Ezzell formula for the adjusted cost of capital assumes that

The MM formula for the adjusted cost of capital takes into consideration only the effect of the interest tax shield on permanent debt.

The APV method includes the NPV of a project assuming all-equity financing and then adds in the NPV of financing effects. The financing effects are

A project costs $7 million and is expected to produce cash flows of $2 million per year for 10 years. The opportunity cost of capital is 16 percent. If the firm has to issue stock to undertake the project and issue costs are $0.5 million, what is the project's APV?

In the case of large international investments, the project might include I.custom-tailored project financing; II.special contracts with suppliers; III.special contracts with customers; IV.special arrangements with governments

The APV method can be used for valuing entire businesses.

Discuss the advantages and limitations of using the weighted average cost of capital as a discount rate to evaluate capital budgeting projects.

Given are the following data for year 1: Profit after taxes = $5 million; Depreciation = $2 million; Investment in fixed assets = $4 million; Investment net working capital = $1 million. Calculate the free cash flow (FCF) for year 1.

Enterprise zone subsidies, a government program that provides financial incentives to make investments in a specific location, increase APV.

The flow to equity method provides an accurate estimate of the value of a firm if

Generally, the imposition of government restrictions increases the APV of a project.

A project costs $14 million and is expected to produce cash flows of $4 million per year for 15 years. The opportunity cost of capital is 20 percent. If the firm has to issue stock to undertake the project and issue costs are $1 million, what is the project's APV?

Consider the following data: FCF₁ = $20 million; FCF₂ = $20 million; FCF₃ = $20 million. Assume that free cash flow grows at a rate of 5 percent for year 4 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.

Government loan guarantees for firms may increase APV by reducing bankruptcy risk.

When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the interest tax shield is

Exam 19: Financing and Valuation

Given are the following data: Cost of debt = rD = 6.0%; Cost of equity = rE = 12.1%; Marginal tax rate = 21%; and the firm has 50 percent debt and 50 percent equity. Calculate the after-tax weighted average cost of capital (WACC) .

The flow-to-equity method uses: I.cash flows to equity, after interest and after taxes; II.the cost of equity capital as the discount rate; III.the weighted average cost of capital for discount rate; IV.after-tax cash flows without considering interest and dividend payments

The Miles-Ezzell formula for the adjusted cost of capital assumes that

The MM formula for the adjusted cost of capital takes into consideration only the effect of the interest tax shield on permanent debt.

The APV method includes the NPV of a project assuming all-equity financing and then adds in the NPV of financing effects. The financing effects are

A project costs $7 million and is expected to produce cash flows of $2 million per year for 10 years. The opportunity cost of capital is 16 percent. If the firm has to issue stock to undertake the project and issue costs are $0.5 million, what is the project's APV?

In the case of large international investments, the project might include I.custom-tailored project financing; II.special contracts with suppliers; III.special contracts with customers; IV.special arrangements with governments

The APV method can be used for valuing entire businesses.

Discuss the advantages and limitations of using the weighted average cost of capital as a discount rate to evaluate capital budgeting projects.

Given are the following data for year 1: Profit after taxes = $5 million; Depreciation = $2 million; Investment in fixed assets = $4 million; Investment net working capital = $1 million. Calculate the free cash flow (FCF) for year 1.

Enterprise zone subsidies, a government program that provides financial incentives to make investments in a specific location, increase APV.

The flow to equity method provides an accurate estimate of the value of a firm if

Generally, the imposition of government restrictions increases the APV of a project.

A project costs $14 million and is expected to produce cash flows of $4 million per year for 15 years. The opportunity cost of capital is 20 percent. If the firm has to issue stock to undertake the project and issue costs are $1 million, what is the project's APV?

Consider the following data: FCF1 = $20 million; FCF2 = $20 million; FCF3 = $20 million. Assume that free cash flow grows at a rate of 5 percent for year 4 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.

Government loan guarantees for firms may increase APV by reducing bankruptcy risk.

When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the interest tax shield is

Given are the following data: Cost of debt = r_D = 6.0%; Cost of equity = r_E = 12.1%; Marginal tax rate = 21%; and the firm has 50 percent debt and 50 percent equity. Calculate the after-tax weighted average cost of capital (WACC) .

Consider the following data: FCF₁ = $20 million; FCF₂ = $20 million; FCF₃ = $20 million. Assume that free cash flow grows at a rate of 5 percent for year 4 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.