Chapter 19 Quiz, Financing and Valuation




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 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


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. 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


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


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


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. 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


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


14. When calculating the WACC for a firm, one should use the book values of debt and equity.
A.True
B.False


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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