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.
QUESTION 1
What is the firm’s WACC?
A. 
10% 

B. 
14% 

C. 
20% 

D. 
16% 
QUESTION 2
Under the WACC approach, the NPV of the project is obtained by discounting future ______ using the WACC.
A. 
Free cash flow to equity 

B. 
Tax savings 

C. 
Free cash flow to debt 

D. 
Free cash flow 
QUESTION 3
What is the NPV based on the WACC approach?
A. 
$140 

B. 
$20 

C. 
$200 

D. 
$160 
QUESTION 4
What is the firm’s unlevered cost of capital?
A. 
14% 

B. 
16% 

C. 
10% 

D. 
20% 
Q1.
Please refer to the calculations in screenshot below:
Q2.
Option D: Future Free cash flows are used for calculation of NPV after discounting them with WACC.
Q3.
Please refer to the calculations in screenshot below:
So the NPV is $160
Q4.
The cost of capital of unlevered firm will be same as the cost of equity = 20% (Option D)
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