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Topics: Net present value, Internal rate of return, Time value of money Pages: 30 (2514 words) Published: June 21, 2013
19- Financing and Valuation
The correct answer for each question is indicated by a . | |
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1| INCORRECT| | 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|
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| | | B)| $4.5 million|
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| | | C)| $4.7 million|
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| | | D)| $3.0 million|
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2| INCORRECT| | 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|
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| | | B)| Discounts the cash flows after tax by the WACC|
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| | | C)| Discounts the earnings after tax by the unlevered equity rate|
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| | | D)| Discounts the cash flows after tax by the unlevered equity rate|
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3| INCORRECT| | 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|
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| | | B)| When the project's target debt to value ratio is constant over the life of the project|
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| | | C)| When the project's debt financing is unknown over the life of the project|
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| | | D)| None of the above|
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4| INCORRECT| | 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|
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| | | B)| Adding the weighted average before tax cost of debt to the weighted average cost of equity|
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| | | C)| Adding the weighted average after tax cost of debt to the weighted average cost of equity|
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| | | D)| Dividing the weighted average before tax cost of debt to the weighted average cost of equity|
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5| CORRECT| | 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%|
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| | | B)| 13.8%|
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| | | C)| 27.0%|
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| | | D)| It is impossible to determine the WACC without debt and equity betas|
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6| INCORRECT| | 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|
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| | | B)| It is based on book values of debt and equity|
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| | | C)| It assumes the project is a carbon copy of the firm|
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| | | D)| It can be used to take account of issue costs and other such financing side effects|
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7| INCORRECT| | The cost of common equity for a firm is| |
| | | A)| The required rate of return on the company's stock|
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| | | B)| The yield to maturity on the bond|
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| | | C)| The risk-free rate|
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| | | D)| The market risk premium|
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8| CORRECT| | 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%|
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| | | B)| 14.0%|
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| | | C)| 16.97%|
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| | | D)| None of the above|
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9| INCORRECT| | 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%.|...
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