CF2. Chapter3.C

The weighted average cost of capital is determined by _____ the weighted average cost of equity

• adding the weighted average aftertax cost of debt to

• dividing the weighted average aftertax cost of debt by

• adding the weighted average pretax cost of debt to

• multiplying the weighted average aftertax cost of debt by

To calculate the adjusted present value, you should

• divide the project's levered cash flow by the risk-free rate

• multiply the additional effects of debt by the all-equity project value

• add the additional effects of debt to the all-equity project value

• divide the project's levered cash flow by the risk-adjusted rate

Subsidized financing ________ the APV ___________.

• has no impact on; as the lower interest rate is offset by the lower discount rate

• decreases; by decreasing the NPV of the loan

• has no impact on; as the interest tax deduction is not allowed for subsidized loans

• increases; by increasing the NPV of the loan

The APV method is least useful in which one of these situations

• project involving interest subsidies

• project based on a target debt-to-value ratio

• project with flotation costs

The cost of equity should be lowest when the debt to equity ratio is

• 0.25

• 0

• 0.5

• 1

A firm currently has debt outstanding with a coupon rate of 10 percent. The firm is obtaining subsidized financing for a new project at a rate of 5.5 percent. The current market rate is 8.8 percent and the firm’s tax rate is 35 percent. What discount rate should be used to compute the NPV of the loan?

• 5.5%

• 6.8%

• 8.8%

• 7.75%

The beta of debt is commonly assumed to be

• 1

• 0

• -1

Which of these methods discount levered cash flows?

• WACC

• FTE

• APV

• Both FTE and WACC

Which one of these statements is correct?

• Flotation costs increase the value of RS.

• The cost of equity for an all-equity firm is less than the cost of equity for a levered firm

• The discount rate for levered equity is unaffected by the debt-equity ratio

• The cost of levered equity is indirectly related to beta

In order to value a project which is not scale enhancing you typically need to:

• calculate the equity cost of capital using the risk-adjusted beta of another firm

• replace the risk-free rate with the market rate of return when computing the project’s discount rate

• apply the firm’s current WACC to the project’s cash flows