Question

1. Your firm’s market value balance sheet is given as follows:

   Market Value Balance Sheet
   Excess cash	$30M	Debt	$230M
   Operating Assets	$500M	Equity	$300M
   Asset Value	$530M	Debt + Equity	$530M

   Assume that the you plan to keep the firm’s debt-to-equity ratio fixed. The firm’s corporate tax rate is 50%. The firm’s cost of debt is 10% and cost of equity is 20%.

   Now, suppose that you are considering a new project that will last for one year. According to your analysis, free cash flows from the project are -$1,000 today (i.e. year 0) and $1,322.40 one year from today (i.e. year 1). This new project can be viewed as a “carbon copy” of the entire firm’s existing business. You want to find the NPV of the project using three different DCF methods: WACC/APV/FTE.

   What is the firm’s WACC?

   	A.	10%
   	B.	20%
   	C.	14%
   	D.	16%

3 points   

QUESTION 25

1. Under the WACC approach, the NPV of the project is obtained by discounting future ______ using the WACC.

   	A.	Free cash flow to equity
   	B.	Free cash flow to debt
   	C.	Free cash flow
   	D.	Tax savings

3 points   

QUESTION 26

1. What is the NPV based on the WACC approach?

   	A.	$160
   	B.	$20
   	C.	$200
   	D.	$140

3 points   

QUESTION 27

1. What is the firm’s unlevered cost of capital?

   	A.	14%
   	B.	20%
   	C.	10%
   	D.	16%

3 points   

QUESTION 28

1. What is the NPV of the project if the project were financed by 100% equity (i.e. unlevered)?

   	A.	$200
   	B.	$140
   	C.	$20
   	D.	$160

3 points   

QUESTION 29

1. The new project is financed with the same capital structure as the entire firm (implying that the interest tax shield should be discounted using the unlevered cost of capital). To do so, you raise $464 in debt at year 0. Then, what would the present value of the interest tax shield be? Assume that the interest rate on the debt is the same as the firm’s cost of debt (i.e. 10%).

   	A.	$160
   	B.	$200
   	C.	$20
   	D.	$140

3 points   

QUESTION 30

1. What is the NPV of the project based on the APV approach?

   	A.	$200
   	B.	$140
   	C.	$160
   	D.	$20

3 points   

QUESTION 31

1. What is the FCFE at year 0? (Hint: You raise $464 in debt at time 0.)

   	A.	-$835.20
   	B.	-$536
   	C.	$536
   	D.	$835.20

3 points   

QUESTION 32

1. What is the FCFE at year 1? (Hint: You repay the debt of $464 at time 1.)

   	A.	-$536
   	B.	$835.20
   	C.	-$835.20
   	D.	$536

3 points   

QUESTION 33

1. Which of the following serves as the discount rate for free cash flows to equity?

   	A.	10%
   	B.	16%
   	C.	14%
   	D.	20%

3 points   

QUESTION 34

1. What is the NPV of the project based on the FTE approach?

   	A.	$140
   	B.	$20
   	C.	$200
   	D.	$160

3 points   

QUESTION 35

1. Do the WACC/APV/FTE approaches produce identical NPV values?

   Yes

   No

Answer 1

Question 1) firms wacc

Cost of equity is 20% and cost of debt is 10%

After tax cost of debt is 10(1-0.5) = 5%

Equity is 300 debt is 230

Wacc = (300(20)+230(5))/530 = 14% approx

B) in wacc approach n.p.v is calculated by discounting free cash flow to the firm ( both debt and equity) as wcc is weighted average of both debt and equity so answer is option c

C)n.p.v based on wcc approach

P.v of cash inflow is 1322.40/1.14 = 1160

P.v of outflow is 1000

N.p.v is 160 correct answer is option A

D) firms unlevered cost of capital is cost without considering debt so cost of equity and preferred shares as there are no preferred share that is equal to cost of equity which is 20% so answer is option B

Note: according to HOMEWORKLIB POLICY if multiple subparts asked in a question first four subparts are answered unless student specify the question to be answered