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Analysis of APV Method - 20 Questions

Authored by Thu Trang

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Analysis of APV Method - 20 Questions
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20 questions

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1.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

Assuming two companies have the same FCFF, the same growth rate, and the same operational risk, but one company uses more debt than the other. According to the APV method, which of the following is likely to reduce the value of the company with higher debt?

Increase the cost of equity

Increased tax benefits

Expected bankruptcy costs exceed tax benefits

Reduce the corporate income tax rate

2.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

A company has a current FCFF of 100 million, a growth rate of 4%, and an unlevered cost of equity of 10%. Calculate the value of the unlevered company using the APV method.

1,000 million

1,733 million

2,000 million

2,500 million

3.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

A company has a current stock beta of 1.5, a D/E ratio of 0.6, and a tax rate of T = 25%. Calculate the unlevered beta of the company.

0.93

0.98

1.03

1.12

4.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

The company has a debt of 800 million and a corporate income tax rate of 20%. If the debt is perpetual, the tax benefit from the debt is:

80 million

100 million

160 million

Not determined due to lack of cost of capital

5.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

When is the APV method more appropriate than the discounted cash flow method with WACC?

When the capital structure is stable

When debt is adjusted to the market

When the company has negative cash flow

When the capital structure changes significantly over time

6.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

Why does the APV method separate the tax benefits and bankruptcy costs, instead of combining them into the cost of capital like the WACC method?

To simplify the valuation process

Because this method can only be used when there is no financial leverage

To clearly analyze each factor affecting the firm's value

Because there is no need to calculate the cost of equity

7.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

If direct bankruptcy costs account for 8% of the firm's value and the probability of bankruptcy is 15%, the expected value of bankruptcy costs is:

1.2%

2%

8%

15%

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