Question 1

The value of a corporation in a levered buyout is composed of which following four parts:

Accepted Answer

A)   unlevered cash flows and interest tax shields during the debt paydown period, unlevered terminal value, and asset sales.
B)   unlevered cash flows and interest tax shields during the debt paydown period, unlevered terminal value and interest tax shields after the paydown period.
C)   levered cashflows and interest tax shields during the debt paydown period, levered terminal value and interest tax shields after the paydown period.
D)   levered cashflows and interest tax shields during the debt paydown period, unlevered terminal value and interest tax shields after the paydown period.E) A) and D)
F) All of the above

Question 2

The Free-Float Company, a company in the 36% tax bracket, has riskless debt in its capital structure which makes up 40% of the total capital structure, and equity is the other 60%. The beta of the assets for this business is .8 and the equity beta is:

Accepted Answer

A)   .80
B)   .73
C)   .53
D)   1.14
E)   1.47F) B) and C)
G) None of the above

Question 3

In calculating the NPV using the Flow-To-Equity approach the discount rate:

Accepted Answer

A)   is the all equity cost of capital.
B)   is the cost of equity for the levered firm.
C)   is the all equity cost of capital minus the weighted average cost of debt.
D)   is the weighted average cost of capital.
E)   is the all equity cost of capital plus the weighted average cost of debt.F) A) and E)
G) A) and D)

Question 4

Floatation costs are incorporated into the APV framework by:

Accepted Answer

A)   adding them into the all equity value of the project.
B)   subtracting them from the all equity value of the project.
C)   incorporating them into the WACC.
D)   disregarding them.E) B) and C)
F) A) and D)

Question 5

The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $100,000 for each of the next 20 years. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%?

Accepted Answer

A)   $59,401.
B)   $59,901.
C)   $60,401.
D)   $69,901.E) A) and B)
F) B) and D)

Question 6

Quick-Link has debt outstanding whose market value is $200 million, and equity outstanding with a market value of $800 million. Quick-Link is in the 34% tax bracket, and its debt is considered riskless. Merrill Lynch has provided an equity beta of 1.50. Given a risk free rate of 3% and an expected market return of 12%, calculate the discount for a scale enhancing project in the hypothetical case that Quick-Link is all equity financed.

Accepted Answer

Unlevered beta = 1.5/[1 + .66(...

Exam 18: Valuation and Capital Budgeting for the Levered Firm

Correct Answer
verified
Unlevered beta = 1.5/[1 + .66(...
View Answer

Floatation costs are incorporated into the APV framework by:

Correct Answer
verified

In calculating the NPV using the Flow-To-Equity approach the discount rate:

Correct Answer
verified

The value of a corporation in a levered buyout is composed of which following four parts:

Correct Answer
verified

The Free-Float Company, a company in the 36% tax bracket, has riskless debt in its capital structure which makes up 40% of the total capital structure, and equity is the other 60%. The beta of the assets for this business is .8 and the equity beta is:

Correct Answer
verified

Correct Answer
verified

Exam 18: Valuation and Capital Budgeting for the Levered Firm

Correct AnswerverifiedUnlevered beta = 1.5/[1 + .66(...View AnswerShow Answer

Floatation costs are incorporated into the APV framework by:

Correct AnswerverifiedShow Answer

In calculating the NPV using the Flow-To-Equity approach the discount rate:

Correct AnswerverifiedShow Answer

The value of a corporation in a levered buyout is composed of which following four parts:

Correct AnswerverifiedShow Answer

The Free-Float Company, a company in the 36% tax bracket, has riskless debt in its capital structure which makes up 40% of the total capital structure, and equity is the other 60%. The beta of the assets for this business is .8 and the equity beta is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified
Unlevered beta = 1.5/[1 + .66(...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified