Corporate Finance 2_Quiz 5

1. 1)  If you discount a project's expected future unlevered aftertax cash flows by the ________ and then subtract the initial investment you will calculate the:

• 1. weighted cost of capital; project NPV.

• 1. cost of capital for the unlevered firm; all-equity net present value.

• 1. cost of equity capital for the levered firm; all-equity net present value.

• 1. cost of capital for the unlevered firm; adjusted present value.

1.  The flow-to-equity (FTE) approach in capital budgeting is defined as the:

   1. A)  dividends and capital gains that will be available to flow to shareholders of a

      firm.

   2. B)  discounting of all project cash flows at the overall cost of capital.

   3. C)  discounting of a project's levered cash flows to the equityholders at the required

      return on equity.

   4. D)  discounting of a project's unlevered cash flows to the equityholders at the

      WACC.

   5. E)  scale enhancing discount process.

• 1. dividends and capital gains that will be available to flow to shareholders of a

     firm.

• 1. discounting of all project cash flows at the overall cost of capital.

• 1. discounting of a project's levered cash flows to the equityholders at the required

     return on equity.

• 1. discounting of a project's unlevered cash flows to the equityholders at the

     WACC.

1. Given the all-equity cost of capital, the cost of levered equity can be computed as:

• 1. RS = R0 + (1 − tC)B.

• 1. RS = R0 + (B/S)(1 − tC)(R0 − RB).

• 1. RS = (B/S)(R0) + (1 − tC)B.

• 1. R0 = Rs + (1 − tC)B.

1. The weighted average cost of capital is determined by ________ the weighted average cost of equity.

• 1. adding the weighted average pretax cost of debt to

• 1. adding the weighted average aftertax cost of debt to

• 1. dividing the weighted average aftertax cost of debt by

• 1. dividing the weighted average pretax cost of debt by

5. The adjusted present value method (APV), the flow to equity (FTE) method, and the weighted average cost of capital (WACC) method produce equivalent results, but each
   can have difficulties making computation impossible at times. Given this, which one of these is a correct statement?

• 1. Use the WACC method when the level of debt is known over a project's life.

• 1. The APV method is the most commonly used method in actual practice.

• 1. Use the FTE method when the level of debt is known over a project's life.

• 1. The WACC method is appropriate when the target debt-to-value ratio applies over a project's life.

5.  A firm currently has debt outstanding with a coupon rate of 7 percent. The firm is obtaining subsidized financing for a new project at a rate of 5.5 percent. The current
   market rate is 6.8 percent and the firm's tax rate is 21 percent. What discount rate
   should be used to compute the NPV of the loan?

   A) 7 percent
   B) 3.575 percent C) 4.42 percent D) 6.8 percent E) 5.5 percent

• 5. 7 percent

• 5. 3.575 percent

• 5. 4.42 percent

• 5. 6.8 percent

5. Hilltop Paving has a levered equity cost of capital of 14.92 percent. The debt-to-value ratio is .4, the assumed tax rate is 23 percent, and the pretax cost of debt is 7.2 percent. What is the estimated unlevered cost of equity?

• 5. 12.08 percent

• 5. 12.30 percent

• 5. 10.97 percent

• 5. 13.06 percent

5. Jensen's has a total value of $548,000 and debt valued at $262,000. What is the weighted average cost of capital if the aftertax cost of debt is 7.2 percent and the cost of equity is 12.6 percent?

• 11.48 percent

• 10.02 percent

• 11.13 percent

• 10.88 percent

9. Webster Corp. is planning to build a new shipping depot. The initial cost of the investment is $1.18 million. Efficiencies from the new depot are expected to reduce
   aftertax annual costs by $105,000 forever. The corporation has a total value of $62.4
   million and has outstanding debt of $38.7 million. What is the NPV of the project if the

   firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent?

• 9. $72,581

• 9. $163,669

• 9. −$531,736

• 9. $46,509

9. TTC is planning to raise $3.25 million for three years at an interest rate of 7.35 percent to finance their expansion. The Alban County Board of Commissioners has just offered
   the firm the $3.25 million they need at 5.25 percent if the firm builds in Alban County,
   pays the interest annually, and repays the principal at the end of three years. What is the

   net present value of the loan to TTC if the firm's tax rate is 21 percent and it accepts the county's offer?

• $293,651

• $186,416

• $271,405

• $212,100