The correct answer for each question is indicated by a .

1

A project costs $14.7 million and is expected to produce cash flows of $4 million a year for 15 years. The opportunity cost of capital is 20%. If the firm has to issue stock to undertake the project and issue costs are $1 million, what is the project's APV?

A)

$3.7 million

B)

$4.5 million

C)

$4.7 million

D)

$3.0 million

2

The method to determine the net present value for an all equity firm

A)

Discounts the cash flows after tax by the levered equity rate

B)

Discounts the cash flows after tax by the WACC

C)

Discounts the earnings after tax by the unlevered equity rate

D)

Discounts the cash flows after tax by the unlevered equity rate

3

The APV method to value a project should be used:

A)

When the financing feedbacks are numerous and important

B)

When the project's target debt to value ratio is constant over the life of the project

C)

When the project's capital is rebalanced over the life of the project

D)

None of the above

4

The after-tax weighted average cost of capital is determined by:

A)

Multiplying the weighted average after tax cost of debt by the weighted average cost of equity

B)

Adding the weighted average before tax cost of debt to the weighted average cost of equity

C)

Adding the weighted average after tax cost of debt to the weighted average cost of equity

D)

Dividing the weighted average before tax cost of debt to the weighted average cost of equity

5

A firm has a total value of $1 million and debt valued at $400,000. What is the after-tax weighted average cost of capital if the after tax cost of debt is 12% and the cost of equity is 15%?

A)

13.5%

B)

13.8%

C)

27.0%

D)

It's impossible to determine the WACC without debt and equity betas

6

Which of the following statements characterize(s) the weighted average cost of capital formula?

A)

It requires knowledge of the required return on the firm if it is all-equity financed

B)

It is based on book values of debt and equity

C)

It assumes the project is a carbon copy of the firm

D)

It can be used to take account of issue costs and other such financing side effects

7

The cost of common equity for a firm is

A)

The required rate of return on the company's stock

B)

The yield to maturity on the bond

C)

The risk-free rate

D)

The market risk premium

8

A firm is financed with 30% risk-free debt and 70% equity. The risk-free rate is 5%, the firm's cost of equity capital is 15%, and the firm's marginal tax rate is 35%. What is the firm's weighted average cost of capital?

A)

5.00%

B)

11.48%

C)

12.00%

D)

15.00%

9

The CR Corp. maintains a debt-equity ratio of 0.5. The cost of equity for CR Corp. is 15% and the after-tax cost of debt is 9%. What is the after-tax weighted average cost of capital?

A)

11.86%

B)

12.00%

C)

13.00%

D)

None of the above

10

Which of the following instruments has a tax impact in determining the firm's cost of capital?

A)

Municipal bonds

B)

Preferred stock

C)

Common stock

D)

Corporate bonds

11

A very large firm has a debt beta of zero. If the cost of equity is 11% and the risk-free rate is 5%, the cost of debt is:

A)

5%

B)

6%

C)

11%

D)

15%

12

The present value of free cash flow is $4 million and the present value of the horizon value is $20 million. Calculate the present value of the business.

A)

$54million

B)

$16 million

C)

$20 million

D)

$24 million

13

What is the adjusted present value of a project with a NPV = $15 million, a bond issue cost of $2 million, and a stock issue cost of $1 million?

A)

$10 million

B)

$12 million

C)

$15 million

D)

$18 million

14

APV equals the sum of the base-case NPV and

A)

PV of the financing side effects

B)

NPV of taxes

C)

PV of taxes and interest

D)

None of the above

15

Free cash flow equals

A)

Profit before tax + depreciation + investment in fixed assets + investment in working capital

B)

Profit after tax + depreciation + investment in fixed assets − investment in working capital

C)

Profit after tax + depreciation + investment in fixed assets

D)

Profit after tax + depreciation + investment in fixed assets + investment in working capital

E-mail Your Results

Date:

My name:

Section ID:

E-mail these results to:

E-mail address:

Format:

Me:

My Instructor:

My TA:

Other:

To learn more about the book this website supports, please visit its Information Center.

You must be a registered user to view the premium content in this website.

If you already have a username and password, enter it below. If your textbook
came with a card and this is your first visit to this site, you can
use your registration code
to
register.