Question 1

The flow-to-equity approach has been used by the firm to value their capital budgeting projects. The total investment cost at time 0 is $640,000. The company uses the flow-to-equity approach because they maintain a target debt to value ratio over project lives. The company has a debt to equity ratio of 0.5. The present value of the project including debt financing is $810,994. What is the relevant initial investment cost to use in determining the value of the project?

Question 2

The Gold Paving Co. has an equity cost of capital of 16.97%. The debt to value ratio is .6, the tax rate is 34%, and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?

Question 3

The Company is in the 36% tax bracket, has riskless debt which makes up 40% of the total capital structure, and equity is the other 60%. The beta of the assets for this business is .8 and the equity beta is: _____________

Question 4

The Azzam Oil Company is considering a project that will cost $50 million and have a year-end after-tax cost savings of $7 million in perpetuity. Azzam's before tax cost of debt is 10% and its cost of equity is 16%. The project has risk similar to that of the operation of the firm, and the target debt-equity ratio is 1.5. What is the NPV for the project if the tax rate is 34%?