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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 |
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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 |
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3 | |
The APV method to value a project should be used: |
| | A) | When the project's level of debt is known over the life of the project |
| | B) | When the project's target debt to value ratio is constant over the life of the project |
| | C) | When the project's debt financing is unknown over the life of the project |
| | D) | None of the above |
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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 |
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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 is impossible to determine the WACC without debt and equity betas |
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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 |
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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 |
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8 | |
The Simplex Co. has an equity cost of capital of 17%. The debt to equity ratio is 1.5 and a cost of debt is 11%. What is the cost of equity if the firm was unlevered? (Assume a tax rate of 33%) |
| | A) | 3.06% |
| | B) | 14.0% |
| | C) | 16.97% |
| | D) | None of the above |
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9 | |
The DRD Company has a debt equity ratio of 1.5. The cost of debt is 11% and the unlevered equity is 14%. Calculate the weighted average cost of capital for the firm if the tax rate is 33%. |
| | A) | 7.37% |
| | B) | 25.1% |
| | C) | 11.22% |
| | D) | None of the above |
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10 | |
The MFC Corporation has decided to build a new facility. The cost of the facility is estimated to be $12.5 million. MFC wishes to finance this project using its traditional debt-to-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total floatation cost of raising funds? |
| | A) | $75,000 |
| | B) | $300,000 |
| | C) | $500,000 |
| | D) | $375,000 |
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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% |
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12 | |
When a project is not a perpetuity, what bias (if any) results from using the MM formula? |
| | A) | The MM formula overestimates the NPV |
| | B) | The MM formula underestimates the NPV |
| | C) | Cannot say |
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13 | |
The value of a project to a levered firm is equal to the unlevered firm project value plus the: |
| | A) | Cost of financial distress, minus floatation costs, plus taxes, plus debt financing subsidies |
| | B) | Tax subsidies, minus floatation costs, minus financial distress costs, plus debt financing subsidies |
| | C) | Tax subsidies, plus floatation costs, minus financial distress costs, plus debt financing subsidies |
| | D) | Taxes paid, minus floatation costs, plus financial distress costs, plus debt financing subsidies |
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14 | |
When calculating the WACC for a firm, one should use the book values of debt and equity. |
| | A) | True |
| | B) | False |
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15 | |
Discounting at the WACC assumes that debt is rebalanced every period to maintain a constant ratio of debt to market value of the firm. |
| | A) | True |
| | B) | False |
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