Show Question 68 WACC, CFFA, capital budgeting A manufacturing company is considering a new project in the more risky services industry. The cash flows from assets (CFFA) are estimated for the new project, with interest expense excluded from the calculations. To get the levered value of the project, what should these unlevered cash flows be discounted by? Assume that the manufacturing firm has a target debt-to-assets ratio that it sticks to. Question 75 WACC, CAPM A company has:
What is the company's after-tax weighted average cost of capital (WACC)? Assume a classical tax system. Question 78 WACC, capital structure A company issues a large amount of bonds to raise money for new projects of similar risk to the company's existing projects. The net present value (NPV) of the new projects is positive but small. Assume a classical tax system. Which statement is NOT correct? Question 84 WACC, capital structure, capital budgeting A firm is considering a new project of similar risk to the current risk of the firm. This project will expand its existing business. The cash flows of the project have been calculated assuming that there is no interest expense. In other words, the cash flows assume that the project is all-equity financed. In fact the firm has a target debt-to-equity ratio of 1, so the project will be financed with 50% debt and 50% equity. To find the levered value of the firm's assets, what discount rate should be applied to the project's unlevered cash flows? Assume a classical tax system. Question 85 WACC, CAPM A company has:
What is the company's after-tax weighted average cost of capital (WACC) in a classical tax system? Question 88 WACC, CAPM A firm can issue 3 year annual coupon bonds at a yield of 10% pa and a coupon rate of 8% pa. The beta of its levered equity is 2. The market's expected return is 10% pa and 3 year government bonds yield 6% pa with a coupon rate of 4% pa. The market value of equity is $1 million and the market value of debt is $1 million. The corporate tax rate is 30%. What is the firm's after-tax WACC? Assume a classical tax system. Question 89 WACC, CFFA, interest tax shield A retail furniture company buys furniture wholesale and distributes it through its retail stores. The owner believes that she has some good ideas for making stylish new furniture. She is considering a project to buy a factory and employ workers to manufacture the new furniture she's designed. Furniture manufacturing has more systematic risk than furniture retailing. Her furniture retailing firm's after-tax WACC is 20%. Furniture manufacturing firms have an after-tax WACC of 30%. Both firms are optimally geared. Assume a classical tax system. Which method(s) will give the correct valuation of the new furniture-making project? Select the most correct answer. Question 91 WACC, capital structure A firm has a debt-to-assets ratio of 50%. The firm then issues a large amount of equity to raise money for new projects of similar systematic risk to the company's existing projects. Assume a classical tax system. Which statement is correct? Question 97 WACC, no explanation A company has:
What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system. Question 113 WACC, CFFA, capital budgeting The US firm Google operates in the online advertising business. In 2011 Google bought Motorola Mobility which manufactures mobile phones. Assume the following:
You are a manager at Motorola. You must value a project for making mobile phones. Which method(s) will give the correct valuation of the mobile phone manufacturing project? Select the most correct answer. The mobile phone manufacturing project's: Question 115 capital structure, leverage, WACC A firm has a debt-to-assets ratio of 50%. The firm then issues a large amount of debt to raise money for new projects of similar market risk to the company's existing projects. Assume a classical tax system. Which statement is correct? Question 117 WACC A firm can issue 5 year annual coupon bonds at a yield of 8% pa and a coupon rate of 12% pa. The beta of its levered equity is 1. Five year government bonds yield 5% pa with a coupon rate of 6% pa. The market's expected dividend return is 4% pa and its expected capital return is 6% pa. The firm's debt-to-equity ratio is 2:1. The corporate tax rate is 30%. What is the firm's after-tax WACC? Assume a classical tax system. Question 118 WACC A company has:
The corporate tax rate is 30%. All returns and yields are given as effective annual rates. What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system. Question 302 WACC, CAPM Which of the following statements about the weighted average cost of capital (WACC) is NOT correct? Question 303 WACC, CAPM, CFFA There are many different ways to value a firm's assets. Which of the following will NOT give the correct market value of a levered firm's assets ##(V_L)##? Assume that:
Where: ###r_\text{WACC before tax} = r_D.\frac{D}{V_L} + r_{EL}.\frac{E_L}{V_L} = \text{Weighted average cost of capital before tax}### ###r_\text{WACC after tax} = r_D.(1-t_c).\frac{D}{V_L} + r_{EL}.\frac{E_L}{V_L} = \text{Weighted average cost of capital after tax}### ###NI_L=(Rev-COGS-FC-Depr-\mathbf{IntExp}).(1-t_c) = \text{Net Income Levered}### ###CFFA_L=NI_L+Depr-CapEx - \varDelta NWC+\mathbf{IntExp} = \text{Cash Flow From Assets Levered}### ###NI_U=(Rev-COGS-FC-Depr).(1-t_c) = \text{Net Income Unlevered}### ###CFFA_U=NI_U+Depr-CapEx - \varDelta NWC= \text{Cash Flow From Assets Unlevered}### Question 370 capital budgeting, NPV, interest tax shield, WACC, CFFA
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What is the net present value (NPV) of the project? Question 406 leverage, WACC, margin loan, portfolio return One year ago you bought $100,000 of shares partly funded using a margin loan. The margin loan size was $70,000 and the other $30,000 was your own wealth or 'equity' in the share assets. The interest rate on the margin loan was 7.84% pa. Over the year, the shares produced a dividend yield of 4% pa and a capital gain of 5% pa. What was the total return on your wealth? Ignore taxes, assume that all cash flows (interest payments and dividends) were paid and received at the end of the year, and all rates above are effective annual rates. Hint: Remember that wealth in this context is your equity (E) in the house asset (V = D+E) which is funded by the loan (D) and your deposit or equity (E). Question 411 WACC, capital structure A firm plans to issue equity and use the cash raised to pay off its debt. No assets will be bought or sold. Ignore the costs of financial distress. Which of the following statements is NOT correct, all things remaining equal? Question 418 capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM
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What is the net present value (NPV) of the project? Question 419 capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM, no explanation
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What is the net present value (NPV) of the project? Question 766 CFFA, WACC, interest tax shield, DDM Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. Both the operating and firm free cash flows are constant (but not equal to each other).
What is the value of the levered firm including interest tax shields? Question 773 CFFA, WACC, interest tax shield, DDM Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. Both the operating and firm free cash flows are constant (but not equal to each other).
What is the value of the levered firm including interest tax shields? Question 774 leverage, WACC, real estate One year ago you bought a $1,000,000 house partly funded using a mortgage loan. The loan size was $800,000 and the other $200,000 was your wealth or 'equity' in the house asset. The interest rate on the home loan was 4% pa. Over the year, the house produced a net rental yield of 2% pa and a capital gain of 2.5% pa. Assuming that all cash flows (interest payments and net rental payments) were paid and received at the end of the year, and all rates are given as effective annual rates, what was the total return on your wealth over the past year? Hint: Remember that wealth in this context is your equity (E) in the house asset (V = D+E) which is funded by the loan (D) and your deposit or equity (E). Question 804 CFFA, WACC, interest tax shield, DDM Use the below information to value a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now. Note that ‘k’ means kilo or 1,000. So the $30k is $30,000.
Which of the following statements is NOT correct? Question 936 CAPM, WACC, IRR You work for XYZ company and you’ve been asked to evaluate a new project which has double the systematic risk of the company’s other projects. You use the Capital Asset Pricing Model (CAPM) formula and input the treasury yield ##(r_f )##, market risk premium ##(r_m-r_f )## and the company’s asset beta risk factor ##(\beta_{XYZ} )## into the CAPM formula which outputs a return. This return that you’ve just found is: Question 1004 CFFA, WACC, interest tax shield, DDM Use the below information to value a mature levered company with growing annual perpetual cash flows and a constant debt-to-assets ratio. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. The firm's debt funding comprises annual fixed coupon bonds that all have the same seniority and coupon rate. When these bonds mature, new bonds will be re-issued, and so on in perpetuity. The yield curve is flat.
Which of the following statements is NOT correct? Question 1006 CAPM, beta, leverage, WACC, real estate Four retail business people compete in the same city. They are all exactly the same except that they have different ways of funding or leasing the shop real estate needed to run their retail business. The two main assets that retail stores need are:
Lease contract prices are fixed for the term of the lease and based on expectations of the future state of the economy. When leases end, a new lease contract is negotiated and the lease cost may be higher or lower depending on the state of the economy and demand and supply if the economy is:
Assume that the market’s expected return is 10% pa, required returns are expected to remain constant, shop assets can be valued as a perpetuity of lease profits, and that buying, selling, shutting down, moving out, moving in and opening a new shop has negligible (low) cost. Store owners can invest surplus funds in alternative investments that also earn the 10% pa market return. Which retail business person will have the LOWEST beta of equity (or net wealth)? Question 1007 WACC, leverage, CFFA, EFCF An analyst is valuing a levered company whose owners insist on keeping the dollar amount of debt funding fixed. So the company cannot issue or repay its debt, its dollar value must remain constant. Any funding gaps will be met with equity. The analyst is wondering, as he changes inputs into his valuation, such as the forecast growth rate of sales, then asset values and other things will change. This makes it hard to figure out which values can be held constant and would therefore make good model inputs, rather than outputs which vary depending on the inputs. Assume that the cost of debt (yield) remains constant and the company’s asset beta will also remain constant since any expansion (or downsize) will involve buying (or selling) more of the same assets. Which of the following values can be assumed to stay constant when projected sales growth increases? Question 1008 WACC, leverage, CFFA, EFCF An analyst is valuing a levered company whose owners insist on keeping a constant market debt to assets ratio into the future. The analyst is wondering how asset values and other things in her model will change when she changes the forecast sales growth rate. Which of the below values will increase as the forecast growth rate of sales increases, with the debt to assets ratio remaining constant? Assume that the cost of debt (yield) remains constant and the company’s asset beta will also remain constant since any expansion (or downsize) will involve buying (or selling) more of the same assets. The analyst should expect which value or ratio to increase when the forecast growth rate of sales increases and the debt to assets ratio remains unchanged? In other words, which of the following values will NOT remain constant? Question 1026 CFFA, WACC, interest tax shield Meier and Tarhan (2006) conducted an interesting survey of corporate managers. The results are copied in Table 7 below. What proportion of managers are evaluating levered projects correctly?
The rows of the cross-tabulation indicate what the self-reported hurdle rate represents and the columns denote five different ways to calculate cash flows, (i) to (v), plus the “other” category. Each cell then displays the fraction of all 113 respondents for a given combination of what the hurdle rate represents and how the firm calculates its cash flows when evaluating a project. The definitions of the cash flow calculations (i)-(v) are as follows: (i) Earnings before interest and after taxes (EBIAT) + depreciation (ii) Earnings before interest and after taxes (EBIAT) + depreciation – capital expenditures – net change in working capital (iii) Earnings (iv) Earnings + depreciation (v) Earnings + depreciation – capital expenditures – net change in working capital Assume that the WACC is after tax, the required return on unlevered equity is the WACC before tax, all projects are levered, the benefit of interest tax shields should be included in the valuation, earnings = net profit after tax (NPAT) and EBIAT = EBIT*(1-tc) which is often also called net operating profit after tax (NOPAT). What proportion of managers are evaluating levered projects correctly? Question 1049 sensitivity analysis, WACC, DDM An analyst has prepared a discounted cash flow model to value a firm's share price. A sensitivity analysis data table with ‘conditional formatting’ shading is shown below. The table shows how changes in the weighted average cost of capital (WACC, left column) and terminal value growth rate (top row) affect the firm's model-estimated share price. The base case estimates are shown in bold. Which of the following statements is NOT correct? The model-estimated share price would normally be expected to: Which of the following statement about cost of capital are true?The correct answer is;The cost of equity is always higher than the cost of debt. The cost of capital refers to the rate of return that must be gained on additional investment if the firm value is to remain unchanged.
Which of the following are generally true about the cost of equity and the cost of debt?Which of the following are generally true about the cost of equity and the cost of debt? The cost of debt increases with leverage. The cost of equity may increase with leverage. The cost of debt is generally lower than the cost of equity.
What is the cost of equity quizlet?The cost of equity is the return required by equity investors given the risk of the cash flows from the firm. 2. Risk that comes from the capital structure of the firm.
Which of the following best describe cost of capital of a company?Which of the following best describes a firm's cost of capital? The rate of return that must be earned on its investments in order to satisfy the firm's investors.
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