Deck 18: International Capital Budgeting

Question 1

The financial manager's responsibility involves

A)increasing the per share price of the company's stock at any cost and by any means,ways and fashion that is possible.
B)the shareholder wealth maximization.
C)which capital projects to select.
D)the shareholder wealth maximization and which capital projects to select.

Answer 1

D

Question 2

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% What is the unlevered after-tax incremental cash flow for year 2?

A)-$4,610
B)$102,300
C)$202,300
D)$255,000

Answer 2

$202,300

Question 3

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 1?

A)$4,300
B)?$202,610
C)?$95,700
D)$57,000

Answer 3

$4,300

Question 4

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 0?

A)?$1,010,000
B)?$1,000,000
C)?$660,000
D)?$2,100,000

Question 5

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% What is the unlevered after-tax incremental cash flow for year 0?

A)-$3,660,000
B)-$5,100,000
C)-$4,000,000
D)-$4,010,000

Question 6

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.What is the firm's cost of equity capital?

A)33.33 percent
B)10.85 percent
C)13.12 percent
D)16.5 percent

Question 7

i = r_debt = 6% OCF₀ = −$100,000 K_u = r_assets = 12% OCF_1-4 = $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34
K_l = r_equity = 27.84% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
What is the NPV of the project using the WACC methodology?

A)$49,613.03
B)$58,028.68
C)$102,727.55
D)$315,666.16

Question 8

i = r_debt = 10% OCF₀ = −$100,000 K_u = r_assets = 15% OCF_1-4 = $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34
K_l = r_equity = 24.9% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
When using the APV methodology,what is the NPV of the interest tax shield?

A)$9,666.51
B)$12,019.32
C)$9,377.31
D)$7,000.73

Question 9

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)payments over 3 years.The first payment is due December 31,2009 and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8 percent.What is the APV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

A)−$3,497,224.43
B)$417,201.05
C)$840,797
D)none of the options

Question 10

Capital budgeting analysis is very important,because it

A)involves,usually expensive,investments in capital assets.
B)has to do with the productive capacity of a firm.
C)will determine how competitive and profitable a firm will be.
D)all of the options

Question 11

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% What is the unlevered after-tax incremental cash flow for year 30?

A)$12,432,300
B)$12,225,390
C)$12,332,300
D)$12,485,000

Question 12

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.What is the required return on assets?

A)33.33 percent
B)10.85 percent
C)13.12 percent
D)16.5 percent

Question 13

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8 percent.What is the APV of this subsidized loan? If you rounded in your intermediate steps,the answer may be slightly different from what you got.Choose the closest.

A)−$3,497,224.43
B)$417,201.05
C)$840,797
D)none of the options

Question 14

i = r_debt = 6% OCF₀ = −$100,000 K_u = r_assets = 12% OCF_1-4 = $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34
K_l = r_equity = 27.84% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
What is the NPV of the project using the APV methodology?

A)$49,613.03
B)$198,469
C)$102,727.55
D)$149,580.12

Question 15

i = r_debt = 10% OCF₀ = −$100,000 K_u = r_assets = 15% OCF_1-4 = $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34
K_l = r_equity = 24.9% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
What is the NPV of the project using the WACC methodology?

A)$58,028.68
B)$49,613.03
C)$48,300.47
D)$102,727.55

Question 16

Perhaps the most important decisions that confront the financial manager are

A)which capital projects to select.
B)the correct capital structure for the firm.
C)the correct capital structure for projects.
D)none of the options

Question 17

The required return on assets is 18 percent.The firm can borrow at 12.5 percent; firm's target debt to value ratio is 3/5.The corporate tax rate is 34 percent,and the risk-free rate is 4 percent and the market risk premium is 9.2 percent. What is the weighted average cost of capital?

A)12.15 percent
B)13.02 percent
C)14.33 percent
D)23.45 percent

Question 18

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 30?

A)$9,027,390
B)$9,234,300
C)$9,134,300
D)$9,287,000

Question 19

i = r_debt = 10% OCF₀ = −$100,000 K_u = r_assets = 15% OCF_1-4 = $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34
K_l = r_equity = 24.9% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
When using the APV methodology,what is the NPV of the depreciation tax shield?

A)$32,051.52
B)$25,777.35
C)$22,794.65
D)$97,152.98

Question 20

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% Assume that the firm will partially finance the project with a subsidized $3,000,000 interest only 30-year loan at 8.0 percent APR with annual payments.Note that eight percent is less than the 10 percent that they normally borrow at.What is the NPV of the loan?

A)$198,469
B)$53,979.83
C)$102,727.55
D)$1,334,851.09

Question 21

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. Using the APV method,what is the value of the debt side effects?

A)$239,072,652.70
B)$66,891,713.66
C)$59,459,301.03
D)$660,000,000

Question 22

The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.Calculate the weighted average cost of capital.

A)33.33 percent
B)8.09 percent
C)9.02 percent
D)16.5 percent

Question 23

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the APV method,what is the value of the debt side effects?

A)$239,072,652.70
B)$66,891,713.66
C)$59,459,301.03
D)$660,000,000

Question 24

The required return on equity for an all-equity firm is 10.0 percent.They currently have a beta of one and the risk-free rate is 5 percent and the market risk premium is 5 percent.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40 percent,the pre-tax cost of debt is 8 percent.Find the beta if this firm changes capital structure.

A)1.12
B)1
C)7.4 percent
D)none of the options

Question 25

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. Using the APV method,what is the value of this project to an all-equity firm?

A)−$46,502,288.10
B)$12,494,643.75
C)$36,580,767.55
D)−$67,163,445.12

Question 26

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. Using the flow to equity methodology,what is the value of the equity claim?

A)−$1,540,000
B)$446,570,866.00
C)$36,580,767.55
D)$470,953,393.70

Question 27

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the flow to equity methodology,what is the value of the equity claim?

A)−$1,540,000
B)$446,570,866.00
C)$36,580,767.55
D)$30,716,236.13

Question 28

Your firm's existing bonds trade with a yield to maturity of eight percent.The state of Missouri has offered to loan your firm $10,000,000 at zero percent for five years.Repayment will be of the form of $2,000,000 per year for five years; the first payment is due in one year. What is the value of this offer?

A)$4,729,622.75
B)$2,014,579.93
C)$0
D)$196,929.88

Question 29

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. Using the weighted average cost of capital methodology,what is the NPV? I didn't round my intermediate steps.If you do,you're not going to get the right answer.

A)−$1,406,301.25
B)$12,494,643.75
C)$36,580,767.55
D)$108,994.618.20

Question 30

Your firm is in the 34 percent tax bracket.The yield to maturity on your existing bonds is 8 percent.The state of Georgia offers to loan your firm $1,000,000 with a two year amortizing loan at a 5 percent rate of interest and annual payments due at the end of the year. The interest will be deductible at the time that you pay.What is the APV of this below-market loan to your firm? I did not round any of my intermediate steps.You might be a little bit off.Pick the answer closest to yours.

A)$64,157.38
B)$417,201.05
C)$840,797
D)none of the options

Question 31

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 4?

A)$281,704,000
B)$465,152,000
C)−$194,848,000
D)$460,796,000

Question 32

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 4?

A)−$281,704,000
B)$465,152,000
C)−$194,848,000
D)$460,796,000

Question 33

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2?

A)$185,796,000
B)$215,152,000
C)$267,952,000
D)$284,848,000

Question 34

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the weighted average cost of capital methodology,what is the NPV? I didn't round my intermediate steps.If you do,you're not going to get the right answer.

A)−$1,406,301.25
B)$12,494,643.75
C)$36,580,767.55
D)$108,994.618.20

Question 35

The required return on equity for a levered firm is 10.60 percent.The debt to equity ratio is ½ the tax rate is 40 percent,the pre-tax cost of debt is 8 percent.Find the cost of capital if this firm were financed entirely with equity.

A)10 percent
B)12 percent
C)8.67 percent
D)none of the options

Question 36

What proportion of the firm is financed by debt for a firm that expects a 15 percent return on equity,a 12 percent return on assets,and a 10 percent return on debt? The tax rate is 25 percent.

A)20 percent
B)1/3
C)60 percent
D)2/3

Question 37

The required return on equity for an all-equity firm is 10.0 percent.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40 percent,the pre-tax cost of debt is 8 percent.Find the new cost of capital if this firm changes capital structure.

A)14.93 percent
B)8.67 percent
C)7.40 percent
D)none of the options

Question 38

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the APV method,what is the value of this project to an all-equity firm?

A)−$46,502,288.10
B)$12,494,643.75
C)$36,580,767.55
D)−$67,163,445.12

Question 39

In the APV model

A)interest tax shields are discounted at i.
B)operating cash flows are discounted at K_u.
C)depreciation tax shields are discounted at i.
D)all of the options

Question 40

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2?

A)$185,796,000
B)$215,152,000
C)$267,952,000
D)$284,848,000

Question 41

What is the expected return on equity for firm in the 40 percent tax bracket with a 15 percent expected return on assets that pays 12 percent on its debt,which totals 25 percent of assets?

A)24 percent
B)15.60 percent
C)16 percent
D)20 percent

Question 42

The ABC Company,a U.S.-based MNC,plans to establish a subsidiary in Spain to manufacture and sell water pumps.ABC has total assets of $80 million,of which $60 million is equity financed.The remainder is financed with debt.ABC considers its current capital structure optimal.The construction cost of the facility in Spain is estimated to be €8,500 million,of which €6,500 million is to be financed at a below-market rate of interest arranged by the Spanish government.The proposed project will increase the borrowing capacity by

A)€1,215 million.
B)€2,215 million.
C)€3,215 million.
D)€4,215 million.

Question 43

Assume that XYZ Corporation is a leveraged company with the following information: K_l = cost of equity capital for XYZ = 13%
I = before-tax borrowing cost = 8%
T = marginal corporate income tax rate = 30%
Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3 percent.

A)35 percent
B)40 percent
C)45 percent
D)50 percent

Question 44

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8 percent. What is the €-denominated NPV of this project? I did not round my intermediate steps,if you did,select the answer closest to yours.

A)€5,563.23
B)€2,270.79
C)€7,223.14
D)€3,554.29

Question 45

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next three years in the U.S.is 2 percent and 3 percent in the euro zone.What spot exchange rate should prevail three years from now?

A)€1.00 = $1.2379
B)€1.00 = $1.2139
C)€1.00 = $0.9903
D)$1.00 = €1.2623

Question 46

Some of the factors (with selected explanations)used in calculating the basic "net present value" and the "incremental" cash flows of a capital project are: (i)expected after-tax terminal value,including recapture of working capital
(ii)net income,which belongs to the equity holders of the firm
(iii)initial investment at inception
(iv)depreciation,and the fact that depreciation is a noncash expense (i.e.,it is removed from the calculation of net income,for tax purposes,but added back because it did not actually flow out of the firm)(v)weighted-average cost of capital
(vi)the firm's after-tax payment of interest to debtholders
(vii)economic life of the capital project in years
The "net present value" of a capital project is calculated by using

A)(i),(ii),and (iii).
B)(ii),(iv),and (vi).
C)(i),(iii),(v),and (vii).
D)(iv),(v),(vi),and (vii).

Question 47

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to

A)the cannibalization of existing projects by new projects.
B)the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of the new project.
C)the cannibalization of existing projects by new projects and the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of the new project.
D)none of the options

Question 48

Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to

A)analyze all of the risks (business,economic,exchange rate uncertainty,political,etc.)inherent in the investment.
B)more fully understand the implications of planned capital expenditures.
C)consider in advance actions that can be taken should an investment not develop as anticipated.
D)all of the options

Question 49

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

A)€1.00 = $1.2379
B)€1.00 = $1.2139
C)€1.00 = $0.9903
D)$1.00 = €1.2623

Question 50

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8 percent.What is the NPV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

A)$406,023.10
B)$840,797
C)$64,157.38
D)$20,659.77

Question 51

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
What is CF5 in dollars?

Question 52

What is the expected return on equity for a tax-free firm with a 15 percent expected return on assets that pays 12 percent on its debt,which totals 25 percent of assets?

A)24 percent
B)15.60 percent
C)16 percent
D)20 percent

Question 53

Some of the factors (with selected explanations)used in calculating the basic "net present value" and the "incremental" cash flows of a capital project are: (i)expected after-tax terminal value,including recapture of working capital
(ii)net income,which belongs to the equity holders of the firm
(iii)initial investment at inception
(iv)depreciation,and the fact that depreciation is a noncash expense (i.e.,it is removed from the calculation of net income,for tax purposes,but added back because it did not actually flow out of the firm)(v)weighted-average cost of capital
(vi)the firm's after-tax payment of interest to debtholders
(vii)economic life of the capital project in years
The "incremental" cash flows of a capital project is calculated by using

A)(i),(ii),and (iii).
B)(ii),(iv),and (vi).
C)(i),(iii),(v),and (vii).
D)(iv),(v),(vi),and (vii).

Question 54

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to

A)distinguish between the market value of a levered firm and the market value of an unlevered firm.
B)discern the blocking of certain cash flows by the host country from being legally remitted to the parent.
C)consider foreign currency fluctuations or extra taxes imposed by the host country on foreign exchange remittances.
D)all of the options

Question 55

As of today,the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

A)€1.00 = $1.5147
B)€1.00 = $1.4854
C)€1.00 = $0.6602
D)$1.00 = €0.6602

Question 56

The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10 percent; inflation over the next three years is 3 percent per year in the U.S.and 2 percent per year in Japan.Calculate the dollar NPV of this project. $$\begin{array} { c c c c } \text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline ¥1,000,000 & ¥ 500,000 & ¥ 500,000 & ¥ 500,000\end{array}$$ I did not round my intermediate steps,if you did,select the answer closest to yours.

A)$267,181.87
B)$14,176.67
C)$2,536.49
D)$2,137.46

Question 57

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
What is CF1 in dollars?

Question 58

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
What is CF0 in dollars?

Question 59

Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors.Assume the corporate tax rate is 40 percent. (Hint: Calculate the tax savings arising from the tax deductibility of interest payments).
$$\begin{array} { l r r r r } & { \text { Levered } } & { \text { Unlevered } } \\\text { Reverue } & \$ 250 & \$ 250 \\\text { Operating cost } & - \$ 100 & - \$ 100 \\\text { Interest expense } & - \$ 20 & \$ 0\end{array}$$

A)$8
B)$18
C)$78
D)$90

Question 60

Which of the following statements is false about "borrowing capacity"?

A)It is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans.
B)It creates tax shields for APV analysis regardless of how the project is actually financed.
C)It is synonymous to the "project debt."
D)It is based on the firm's optimal capital structure.

Question 61

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
Repeat the above project analysis assuming that the Irish firm could replicate the project in Ireland.(i.e.cash flow out the project in Ireland and find break-even price (in €),quantity,NPV,IRR (in euro not dollars).

Question 62

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
What is the dollar-denominated IRR?

Question 63

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.55 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the dollar-denominated IRR of this project?

Question 64

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 3 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Question 65

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.55 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.

Question 66

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.55 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the euro-denominated IRR of this project?

Question 67

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the dollar-denominated IRR of this project?

Question 68

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%.The firm's local cost of capital is i_€ = 10%.The project costs £1,000 and will return £1,150 at the end of one year.The current exchange rate is €2.00 = £1.00.
Suppose that the bank of England is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities:
S₁ (€/£)= €2.20 per £
S₁ (€/£)= €1.80 per £
Following revaluation,the exchange rate is expected to remain steady for at least another year.
Find the IRR in euro for the French firm if they wait one year to undertake the project after the exchange rate rises to S₁(€/£)= €2.20 per £.

Question 69

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 3 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the dollar-denominated IRR of this project?

Question 70

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
Find the break-even price (in dollars)and break-even quantity for the U.S.project.

Question 71

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
What is the NPV of the U.S.-based project to the Irish firm?

Question 72

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 3 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.

Question 73

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 3 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the euro-denominated IRR of this project?

Question 74

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.

Question 75

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the euro-denominated IRR of this project?

Question 76

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%.The firm's local cost of capital is i_€ = 10%.The project costs £1,000 and will return £1,150 at the end of one year.The current exchange rate is €2.00 = £1.00.
Suppose that the bank of England is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities:
S₁ (€/£)= €2.20 per £
S₁ (€/£)= €1.80 per £
Following revaluation,the exchange rate is expected to remain steady for at least another year.
Find the ex post IRR in euro for the French firm if they undertake the project today and then the exchange rate falls to S₁(€/£)= €1.80 per £.

Question 77

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year.
The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity,assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
What is the euro-denominated IRR?

Question 78

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.55 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Question 79

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%.The firm's local cost of capital is i_€ = 10%.The project costs £1,000 and will return £1,150 at the end of one year.The current exchange rate is €2.00 = £1.00.
Suppose that the bank of England is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities:
S₁ (€/£)= €2.20 per £
S₁ (€/£)= €1.80 per £
Following revaluation,the exchange rate is expected to remain steady for at least another year.
Find th e ex post IRR in euro for the French firm if they undertake the project today and then the exchange rate rises to S₁(€/£)= €2.20 per £.

Question 80

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.60 = €1.00.The inflation rate in the U.S.is 6 percent and in the euro zone 2 percent.The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the dollar cash flows to compute the dollar-denominated NPV of this project.