QUESTION 24
[Q2435] 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 debttoequity 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. 
16% 

B. 
14% 

C. 
20% 

D. 
10% 
QUESTION 25
Under the WACC approach, the NPV of the project is obtained by discounting future ______ using the WACC.
A. 
Tax savings 

B. 
Free cash flow to equity 

C. 
Free cash flow to debt 

D. 
Free cash flow 
QUESTION 26
What is the NPV based on the WACC approach?
A. 
$140 

B. 
$160 

C. 
$200 

D. 
$20 
QUESTION 27
What is the firm’s unlevered cost of capital?
A. 
10% 

B. 
20% 

C. 
14% 

D. 
16% 
QUESTION 28
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 
QUESTION 29
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. 
$20 

C. 
$200 

D. 
$140 
Question 24
Kd: cost of debt = 10%
Ke = 20% (cost of common equity)
Total debt = $230m
Total equity = $300m
Total capital = $530m
Wd: % debt = 230/530 = 43.4%
We: % equity = 100%43.4% = 56.6%
tax rate = 50%
WACC = We*Ke + (1  tax rate)*Wd*Kd = 56.6%*20%+(150%)*43.4%*10% = 13.49%
Option B is correct
Question 25
FCF (free cash flow) = FCFF (free cash flow to firm)
Option D is correct
Question 26
NPV = 1000/(1+WACC)^0 + 1322.4/(1+WACC)^1 = 1000/(1+13.49%)^0+1322.4/(1+13.49%)^1 = $165.2128
Option B is correct
Question 27
Unlevered cost of capital = unlevered cost of equity = pretax wacc = 56.6%*20%+(10%)*43.4%*10% = 15.66%
Option D is correct
Get Answers For Free
Most questions answered within 1 hours.