Question
Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3. After three years, the
Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3. After three years, the firm will cease to exist. As of today (i.e. at year 0), the firm is partially financed with a 1-year maturity debt, whose face value is $660 and interest rate is 10%. After the debt matures at year 1, the firm will not issue any more debt and will remain unlevered. Assume that the firms unlevered cost of capital is 20%, and the firms cost of debt is identical to the interest rate on the debt (i.e. 10%). The corporate tax rate is 40%.
QUESTION 1 What is the firms enterprise value if the firm were unlevered?
| A. | $1,024 | |
| B. | $1,524 | |
| C. | $1,012 | |
| D. | $1,000 |
QUESTION 2
What is the discount rate for the interest tax shield?
| A. | Cost of unlevered equity | |
| B. | WACC | |
| C. | Cost of levered equity | |
| D. | Cost of debt |
QUESTION 3
What is the present value of the interest tax shield?
| A. | $24 | |
| B. | $66 | |
| C. | $12 | |
| D. | $33 |
QUESTION 4
What is the firms enterprise value?
| A. | $1,000 | |
| B. | $1,024 | |
| C. | $1,524 | |
| D. | $1,012 |
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An Empire In Pawn Being Lectures And Essays On Indian Colonial And Domestic Finance Preference Free Trade Etc
Authors: A. J. (Alexander Johnstone) Wilson
1st Edition
1290631565, 9781290631563
