Question 1

The APV method is comprised of the all equity NPV of a project and the NPV of financing effects.The four side effects are:

Accepted Answer

The APV method includes the NPV of financing effects such as the cost of issuing new securities, cost of financial distress, tax subsidy of debt, and other subsidies to debt financing. These elements capture the benefits and costs associated with financing decisions separate from the project's operational value.

Question 2

In calculating the NPV using the Flow-To-Equity approach the discount rate:

Accepted Answer

The discount rate used in the Flow-To-Equity approach is the cost of equity for the levered firm, as this method is used to calculate the present value of future cash flows to equity holders. It takes into consideration the risk associated with owning equity in a levered firm, and is therefore the appropriate discount rate to use in this calculation.

Question 3

The appropriate cost of debt to the firm is:

Accepted Answer

C

Question 4

A firm has a total value of $500,000 and debt valued at $300,000.What is the weighted average cost of capital if the after tax cost of debt is 9% and the cost of equity is 14%?

Accepted Answer

The answer of A firm has a total value of...

Question 5

The value of a project to a levered firm is equal to the unlevered firm project value plus the:

Accepted Answer

The value of a project to a levered firm is indeed equal to the value of the project to an unlevered firm plus the tax subsidies (due to the tax deductibility of interest), minus the flotation costs (the costs associated with issuing new securities), plus any subsidies for debt financing. This reflects the net benefit of financing with debt, taking into account the costs and subsidies associated with such financing.

Question 6

The acceptance of a capital budgeting project is usually evaluated on its own merits.That is,capital budgeting decisions are treated separately from capital structure decisions.In reality,these decisions may be highly interwoven.This may result in:

Accepted Answer

The interdependence of capital budgeting and capital structure decisions means that a project's NPV could be affected by the type of financing used. In some cases, adding debt can result in a positive NPV even if the project had a negative NPV when evaluated on its own merits. Therefore, firms may accept some negative NPV all equity projects if they can add enough positive leverage tax shield value by changing their capital structure. Option D correctly reflects this possibility. The other options are incorrect.

Question 7

A key difference between the APV,WACC,and FTE approaches to valuation is:

Accepted Answer

The answer of A key difference between the APV,WACC,and FTE...

Question 8

The FTE 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 FTE approach because they maintain a target debt to value ratio over project lives.The company has a debt to equity ratio of .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?

Accepted Answer

The answer of The FTE approach has been used by...

Question 9

The flow-to-equity (FTE)approach in capital budgeting is defined to be the:

Accepted Answer

The flow-to-equity (FTE) approach involves discounting the cash flows that would flow to equity holders for a project at the required return on equity. This takes into account the fact that different projects may have different levels of risk and therefore require different returns on equity. Option A involves discounting all cash flows at the overall cost of capital, which assumes that the project has the same level of risk as the overall company. Option B is not a commonly used term in finance. Option D describes the potential returns for shareholders of a firm, but does not specifically relate to capital budgeting decisions. Option E involves discounting unlevered cash flows at the WACC, which would not take into account the impact of debt financing on equity holders.

Question 10

In order to value a project which is not scale enhancing you need to:

Accepted Answer

The answer of In order to value a project which...

Question 11

The Felix Filter Corp.maintains a debt-equity ratio of .6.The cost of equity for Richardson Corp.is 16%,the cost of debt is 11% and the marginal tax rate is 30%.What is the weighted average cost of capital? (Round your answer to two decimal places.)

Accepted Answer

The answer of The Felix Filter Corp.maintains a debt-equity ratio...

Question 12

The Webster Corp.is planning construction of a new shipping depot for its single manufacturing plant.The initial cost of the investment is $1 million.Efficiencies from the new depot are expected to reduce costs by $100,000 forever.The corporation has a total value of $60 million and has outstanding debt of $40 million.What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%?

Accepted Answer

The answer of The Webster Corp.is planning construction of a...

Question 13

Although the three capital budgeting methods are equivalent,they all can have difficulties making computation impossible at times.The most useful methods or tools from a practical standpoint are:

Accepted Answer

The answer of Although the three capital budgeting methods are...

Question 14

An appropriate guideline to adopt when determining the valuation formula to use is:

Accepted Answer

Using the APV approach is appropriate when the project is far different from scale enhancing, since it takes into account the value of tax shields and other financing benefits. On the other hand, the WACC approach is suitable when the project is close to being scale enhancing, as it reflects the cost of capital for the firm as a whole. Therefore, the best guideline is to use APV if the project is far different from scale enhancing and use WACC if the project is close to being scale enhancing.

Question 15

The weighted average cost of capital is determined by:

Accepted Answer

The weighted average cost of capital is calculated by adding the weighted average after-tax cost of debt to the weighted average cost of equity. This is because the cost of debt is tax-deductible, so the after-tax cost of debt is lower than the before-tax cost of debt. By adding the after-tax cost of debt to the cost of equity, we get the total cost of capital that reflects the financing mix of the firm.

Question 16

The flow-to-equity approach to capital budgeting is a three step process of:

Accepted Answer

The flow-to-equity approach involves calculating the cash flows available to equity holders after paying interest on debt (levered cash flow). The cost of equity capital for a levered firm is then determined, and the levered cash flows are discounted by the cost of equity capital. This approach is appropriate when evaluating a project or investment that is financed with both equity and debt, and requires taking into account the impact of debt financing on equity holders. Option A is incorrect because it adds interest expense instead of subtracting it. Option B is incorrect because it calculates the unlevered cash flow instead of the levered cash flow. Option D is incorrect because it discounts the levered cash flows at the risk-free rate instead of the cost of equity capital.

Question 17

The APV method to value a project should be used when the:

Accepted Answer

The APV (Adjusted Present Value) method is particularly useful when the project's level of debt is known over its life, as it allows for the separation of the project's value into its value if all-equity financed and the present value of the tax shields due to debt.

Question 18

Discounting the unlevered after tax cashflows by the _____ minus the ______ yields the _______.

Accepted Answer

Discounting the unlevered after tax cashflows by the cost of capital for the unlevered firm minus the initial investment yields the All equity Net Present Value. This approach isolates the project's value without the effects of financing.

Question 19

Which of the following are guidelines for the three methods of capital budgeting with leverage?

Accepted Answer

The guidelines for the three methods of capital budgeting with leverage are to use APV if the project's level of debt is known over the life of the project, and to use FTE or WACC if the firm's target debt-to-value ratio applies to the project over its life. Therefore, the best choice is D, as it correctly identifies when to use each method based on the project's level of debt and the firm's target debt-to-value ratio.

Question 20

The term B x r_b gives:

Accepted Answer

The answer of The term B x r_b gives: ...

Quiz 18: Valuation and Capital Budgeting for the Levered Firm

The APV method is comprised of the all equity NPV of a project and the NPV of financing effects.The four side effects are:

In calculating the NPV using the Flow-To-Equity approach the discount rate:

The appropriate cost of debt to the firm is:

A firm has a total value of $500,000 and debt valued at $300,000.What is the weighted average cost of capital if the after tax cost of debt is 9% and the cost of equity is 14%?

The value of a project to a levered firm is equal to the unlevered firm project value plus the:

The acceptance of a capital budgeting project is usually evaluated on its own merits.That is,capital budgeting decisions are treated separately from capital structure decisions.In reality,these decisions may be highly interwoven.This may result in:

A key difference between the APV,WACC,and FTE approaches to valuation is:

The flow-to-equity (FTE) approach in capital budgeting is defined to be the:

In order to value a project which is not scale enhancing you need to:

The Felix Filter Corp.maintains a debt-equity ratio of .6.The cost of equity for Richardson Corp.is 16%,the cost of debt is 11% and the marginal tax rate is 30%.What is the weighted average cost of capital? (Round your answer to two decimal places.)

Although the three capital budgeting methods are equivalent,they all can have difficulties making computation impossible at times.The most useful methods or tools from a practical standpoint are:

An appropriate guideline to adopt when determining the valuation formula to use is:

The weighted average cost of capital is determined by:

The flow-to-equity approach to capital budgeting is a three step process of:

The APV method to value a project should be used when the:

Discounting the unlevered after tax cashflows by the _ minus the yields the _____.

Which of the following are guidelines for the three methods of capital budgeting with leverage?

The term B x r_b gives:

Quiz 18: Valuation and Capital Budgeting for the Levered Firm

The APV method is comprised of the all equity NPV of a project and the NPV of financing effects.The four side effects are:

In calculating the NPV using the Flow-To-Equity approach the discount rate:

The appropriate cost of debt to the firm is:

A firm has a total value of $500,000 and debt valued at $300,000.What is the weighted average cost of capital if the after tax cost of debt is 9% and the cost of equity is 14%?

The value of a project to a levered firm is equal to the unlevered firm project value plus the:

The acceptance of a capital budgeting project is usually evaluated on its own merits.That is,capital budgeting decisions are treated separately from capital structure decisions.In reality,these decisions may be highly interwoven.This may result in:

A key difference between the APV,WACC,and FTE approaches to valuation is:

The flow-to-equity (FTE) approach in capital budgeting is defined to be the:

In order to value a project which is not scale enhancing you need to:

The Felix Filter Corp.maintains a debt-equity ratio of .6.The cost of equity for Richardson Corp.is 16%,the cost of debt is 11% and the marginal tax rate is 30%.What is the weighted average cost of capital? (Round your answer to two decimal places.)

Although the three capital budgeting methods are equivalent,they all can have difficulties making computation impossible at times.The most useful methods or tools from a practical standpoint are:

An appropriate guideline to adopt when determining the valuation formula to use is:

The weighted average cost of capital is determined by:

The flow-to-equity approach to capital budgeting is a three step process of:

The APV method to value a project should be used when the:

Discounting the unlevered after tax cashflows by the _____ minus the ______ yields the _______.

Which of the following are guidelines for the three methods of capital budgeting with leverage?

The term B x rb gives:

Discounting the unlevered after tax cashflows by the _ minus the yields the _____.

The term B x r_b gives: