Managerial Finance Exam 2 study

Queen and Family's free cash flow to equity during the most recent fiscal year (t = 0) was $100 million. The firm's cash flows are expected to grow at a constant rate of 5% in the future, and the firm is already in a steady state. If the weighted average cost of capital is 12%, before-tax cost of debt is 8%, and cost of equity is 15%, what is the firm's market value of equity (market capitalization)?

$1,050

A company's free cash flow to firm was just FCFF0 = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the steady-state growth rate is g = 4.0%. What is the current enterprise value?

$25.57 million

Blackstone Products is considering a new project which requires the purchase of new equipment for $70,000. The required equipment will incur additional shipping and installation costs of $12,000, and has a 3-year tax life. The accelerated rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4 (based on MACRS). What is the project's year 2 depreciation which would be used in cash flow estimation?

$36,449

Wallace Industries is expected to pay a dividend of $1.85 on its common stock this year. The dividends of Wallace are expected to grow at 5.5% per year indefinitely. If investors require a 10% return on Wallace's stock, what would be the value of the stock today?

$41.11

Wayne Enterprises, Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring. However, FCF is expected to be $50 million in Year 5 (i.e., t = 5), and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the terminal value (in millions) at t = 5?

$883

Shoppers Drug Mart is considering a project that has the following cash flows, WACC, and reinvestment rate data. What is the project's IRR? WACC: 9.50% Reinvestment rate: 11.40% Year 0 1 2 3 4 Cash flows -$1,000 $300 $300 $300 $260

6.35%

Bloom and Co. has no debt or preferred stock⎯ it uses only equity capital, and has two equally-sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept

A Division X project with an 11% return.

Assume a project has normal cash flows (i.e., one initial cash outflow followed by a series of positive cash inflows). All else equal, which of the following statements is FALSE?

A project's IRR increases as the WACC declines.

Which of the following statements is FALSE?

In cash flow estimation, the existence of externalities should only be considered if those externalities have a negative effect on the firm's long-run cash flows

Taylor Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

Project B, which is of below-average risk and has a return of 8.5%

Projects S and L are both normal projects with an initial cost of $10,000, followed by a series of positive cash inflows. Project S's undiscounted net cash flows total $20,000, while L's total undiscounted flows are $30,000. At a cost of capital of 10%, the two projects have identical NPVs. Which project's NPV is more sensitive to changes in the cost of capital? (Hint: Think about the timing of CFs for each project.)

Project L

Projects X and Y both have normal cash flows and are mutually exclusive. Project X has a higher NPV if the cost of capital is less than 12%, whereas Project Y has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT? (Hint: Draw the NPV profiles of the two projects, i.e., the relationship between the cost of capital and NPV, on a graph.)

Project Y probably has a higher IRR.

An exploration of the effect on NPV of changing a single project parameter is called

Sensitivity Analysis

You would consider all the following costs when making a capital budgeting decision, EXCEPT

Sunk Cost

Which of the following factors should be included in the cash flows used to estimate a project's NPV?

The end-of-project recovery of any working capital required to operate the project.

Which of the following statements is TRUE?

There is an "opportunity cost" associated with using reinvested earnings, hence they are not "free."

You, in analyzing a stock, find that its market value exceeds its intrinsic value. This suggests that you believe __________.

he stock should be sold