Question 1

Epiphany is an all-equity firm with an estimated market value of $300,000. The firm sells $250,000 of debt and uses the proceeds to purchase outstanding equity. Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.

Accepted Answer

A)  0.42, 0.58 
B)  0.50, 0.50 
C)  0.17, 0.83 
D)  0.58, 0.42

Question 2

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

Accepted Answer

A)  Compute the weighted average cost of capital. 
B)  Discount the incremental free cash flows of the investment using the weighted average cost of capital. 
C)  Determine the incremental free cash flows of the investment. 
D)  Determine the mean weighted average cost of capital for the firm's industry.

Question 3

Epiphany is an all-equity firm with an estimated market value of $400,000. The firm sells $225,000 of debt and uses the proceeds to purchase outstanding equity. Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.

Accepted Answer

A)  0.28, 0.72 
B)  0.44, 0.56 
C)  0.39, 0.61 
D)  0.56, 0.44

Question 4

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $90 million each year and expects these to grow at 3% each year. The upfront project costs are $900 million and Ford's weighted average cost of capital is 9%. If the issuance costs for external finances are $20 million, what is the net present value (NPV) of the project?

Accepted Answer

A)  $986 million 
B)  $696 million 
C)  $609 million 
D)  $580 million

Question 5

The after-tax cost of equity is ________ the pretax cost of equity.

Accepted Answer

A)  higher than 
B)  lower than 
C)  the same as 
D)  less than or equal to

Question 6

What is the assumption about risk when using WACC to evaluate a project?

Accepted Answer

The answer of What is the assumption about risk when...

Question 7

Your estimate of the market risk premium is 6%. The risk-free rate of return is 4% and General Motors has a beta of 1.4. What is General Motors' cost of equity capital?

Accepted Answer

A)  11.2% 
B)  12.4% 
C)  11.8% 
D)  13.0%

Question 8

A firm has a capital structure with $50 million in equity and $100 million of debt. The cost of equity capital is 11% and the pretax cost of debt is 5%. If the marginal tax rate of the firm is 40%, compute the weighted average cost of capital of the firm.

Accepted Answer

A)  4.5% 
B)  5.1% 
C)  5.67% 
D)  6.5%

Question 9

Assume the total market value of General Motors (GM) is $10 billion. GM has a market value of $6 billion of equity and a face value of $12 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?

Accepted Answer

A)  0.30, 0.70 
B)  0.60, 0.40 
C)  0.40, 0.60 
D)  cannot be determined

Question 10

A firm has outstanding debt with a coupon rate of 5%, ten years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%?

Accepted Answer

A)  2.6% 
B)  2.9% 
C)  3.3% 
D)  3.4%

Question 11

A firm raised all its capital via equity rather than debt. Such a firm is also referred to as a(n) ________ firm.

Accepted Answer

A)  levered 
B)  margined 
C)  risk less 
D)  unlevered

Question 12

An all-equity firm had a dividend expense of $20,000 last year. The market value of the firm is $600,000 and the dividend is expected to increase at 5% each year. What is the cost of equity for this firm?

Accepted Answer

A)  6.80% 
B)  7.65% 
C)  8.50% 
D)  9.35%

Question 13

Assume General Motors has a weighted average cost of capital of 10%. GM is considering investing in a new plant that will save the company $30 million over each of the first two years, and then $25 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project?

Accepted Answer

A)  $65.2 million 
B)  -$76.1 million 
C)  -$86.9 million 
D)  $108.7 million

Question 14

An all-equity firm had a dividend expense of $45,000 last year. The market value of the firm is $800,000 and the dividend is expected to increase at 7% each year. What is the cost of equity for this firm?

Accepted Answer

A)  11.72% 
B)  12.37% 
C)  13.02% 
D)  14.32%

Question 15

The book value of a firm's equity is $100 million and its market value of equity is $200 million. The face value of its debt is $50 million and its market value of debt is $60 million. What is the market value of assets of the firm?

Accepted Answer

A)  $150 million 
B)  $160 million 
C)  $260 million 
D)  $250 million

Question 16

When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average market risk of the firm's investments.

Accepted Answer

A)  diversifiable risk 
B)  market risk 
C)  unsystematic risk 
D)  volatility

Question 17

What is the difference between the effective cost of debt and the cost of debt?

Accepted Answer

The answer of What is the difference between the effective...

Question 18

Financial managers must determine their firm's overall cost of capital based on all sources of financing.

Accepted Answer

A) True 
 B)False

Question 19

The WACC does not depend on the risk of a company's line of business.

Accepted Answer