Question
QUESTION 24 [Q24-35] Your firms market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M
QUESTION 24
[Q24-35] Your firms 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 firms debt-to-equity ratio fixed. The firms corporate tax rate is 50%. The firms 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 firms existing business. You want to find the NPV of the project using three different DCF methods: WACC/APV/FTE.
What is the firms 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
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What is the NPV based on the WACC approach?
A. $140
B. $160
C. $200
D. $20
QUESTION 27
What is the firms 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 firms cost of debt (i.e. 10%).
A. | $160 | |
B. | $20 | |
C. | $200 | |
D. | $140 |
QUESTION 30
What is the NPV of the project based on the APV approach?
A. | $200 | |
B. | $20 | |
C. | $140 | |
D. | $160 |
QUESTION 31
What is the FCFE at year 0? (Hint: You raise $464 in debt at time 0.)
A. | $835.20 | |
B. | $536 | |
C. | -$835.20 | |
D. | -$536 |
QUESTION 32
What is the FCFE at year 1? (Hint: You repay the debt of $464 at time 1.)
A. | -$835.20 | |
B. | $835.20 | |
C. | $536 | |
D. | -$536 |
QUESTION 33
Which of the following serves as the discount rate for free cash flows to equity?
A. | 14% | |
B. | 10% | |
C. | 16% | |
D. | 20% |
QUESTION 34
What is the NPV of the project based on the FTE approach?
A. | $200 | |
B. | $160 | |
C. | $140 | |
D. | $20 |
QUESTION 35
Do the WACC/APV/FTE approaches produce identical NPV values?
Yes
No
Please show work.
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