• One of the main adjustments to the APV method is to add the present value of the interest tax shields

True

False

In evaluating the business strategy, you look at the economic conditions and the industry

True

False

Marketable securities are an example of a non-operating assetThe investment goal is to earn a cost of capital that is greater than the return

True

False

Operating cash flows do not consider

	A.	Cost of goods sold
	B.	Sunk costs
	C.	Taxes
	D.	Sales

• Cal is considering a new project. The project will generate revenues of $16 million and operating costs of $7,000,000 annually for the next 5 years. Interest expense is $1,000,000 per year. It requires an additional machine that costs $20 million dollars and will be fully depreciated (to a zero book value) on a straight line basis over 5 years. The machine has a salvage value of $2,000,000. Cal's tax rate is 30%. The beta of the project is 1.30. The risk-free return is 5% and the return on the market is 15%. What is the net present value of the project?

A. 1,876,716

B. 2,138,981

C. 4,328,001

D. 4,065,736

E. 1,046,800

• The APV method is comprised of the all equity NPV of a project and the NPV of financing effects. The financing effects can include

	A.	Issue costs
	B.	Financial distress costs
	C.	Interest tax savings
	D.	All of the above

• When using adjusted present value, the discount rate is the

	A.	cost of equity
	B.	weighted average cost of capital
	C.	unlevered cost of capital

• Two firms may not be comparable because

	A.	Data has been restated
	B.	Differences in reporting periods
	C.	Accounting differences
	D.	All are reasons the data may not be comparable

• One example of a value driver is

	A.	Earnings before tax
	B.	Weighted average cost of capital
	C.	Debt-equity ratio
	D.	Growth duration

1. One of the main adjustments to the APV method is to add the present value of the interest tax shields True False 2. In evaluating the business strategy, you look at the economic conditions and the industry True False 3. Marketable securities are an example of a nonoperating asset True False 4. The investment goal is to earn a cost of capital that is greater than the return True False 5. Operating cash flows do not consider A Cost of goods . sold B Sunk costs . C Taxes . D Sales . 6. Cal is considering a new project. The project will generate revenues of $16 million and operating costs of $7,000,000 annually for the next 5 years. Interest expense is $1,000,000 per year. It requires an additional machine that costs $20 million dollars and will be fully depreciated (to a zero book value) on a straight line basis over 5 years. The machine has a salvage value of $2,000,000. Cal's tax rate is 30%. The beta of the project is 1.30. The risk-free return is 5% and the return on the market is 15%. What is the net present value of the project? A. 1,876,716 B. 2,138,981 C. 4,328,001 D. 4,065,736 E. 1,046,800 7. The APV method is comprised of the all equity NPV of a project and the NPV of financing effects. The financing effects can include A Issue costs . B Financial distress . costs C Interest tax . savings D All of the above . 8. When using adjusted present value, the discount rate is the A cost of equity . B weighted average cost of . capital C unlevered cost of capital . 9. Two firms may not be comparable because A Data has been restated . B Differences in reporting periods . C Accounting differences . D All are reasons the data may not be . comparable 10. One example of a value driver is A Earnings before tax . B Weighted average cost of . capital C Debt-equity ratio . D Growth duration