340 test 3

to calculate the present value, you should

add the additional effects of debt to the all-equity project value

The cost of equity should be lowest when the debt to equity ratio is

0

when the debt to value ratio changes over time, the best method to use when evaluating a project is

APV

If a project's debt level is known over the life of the project, one should use

APV

The acronym APV stands for:

Adjusted present value

which of these methods discount levered cash flow

FTE

Given the all-equity cost of capital, the cost of levered equity can be computed as

RS = R0 + (B / S)(1 - tc)(R0 - RB).

The cost of equity for an all-equity firm is designated as

Ro

The adjusted present value method (APV), the flow to equity (FTE) method, and the weighted average cost of capital (WACC) method produce equivalent results, but each can have difficulties making computation impossible at times. Given this, which one of these is a correct statement?

The WACC method is appropriate when the target debt-to-value ratio applies over a project's life.

Which one of these statements is correct

The cost of equity for an all-equity firm is less than the cost of equity for a levered firm

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

cost of issuing new securities, cost of financial distress, tax subsidy of debt, and other subsidies to debt financing.

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

a project's level of debt is known over the life of the project.

The weighted average cost of capital is determined by _____ the weighted average cost of equity.

adding the weighted average aftertax cost of debt to

The appropriate cost of debt to the firm is the:

aftertax market borrowing rate

Flotation costs

are amortized using the straight-line method over the life of the loan

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

calculate the equity cost of capital using the risk-adjusted beta of another firm

The flow-to-equity approach to capital budgeting involves all of the following except

computing the PV of the cash flows using the cost of equity for an all-equity firm

If you discount a project's unlevered aftertax cash flows by the _____ and then subtract the initial investment you will calculate the:

cost of capital for the unlevered firm; all-equity net present value.

In calculating NPV using the flow-to-equity approach the discount rate is the:

cost of equity for the levered firm

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

discounting of a project's levered cash flows to the equityholders at the required return on equity.

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 interweaving is most apt to result in

firms accepting some negative NPV all-equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV

subsidizing financing____ the APV____

increases, by increasing the NPV of the loan

The term (RBB) represents the:

pretax cost of debt interest payments per period.

The APV method is least useful in which one of these situations

project based on a target debt-to-value ratio

The WACC approach is not as useful as the APV approach in levered buy outs because

the future reductions in debt are known at the time of the LBO

The beta is commonly assumed to be

zero