Chapter 18

If the flotation costs are 2 percent of gross proceeds, and gross proceeds are $250,000, what is the dollar amount of flotation costs? Multiple choice question. $250,000 $245,000 $5,000 $2,000

$5,000

An industry has three firms with unlevered betas of 0.9, 1, and 1.4. What is the discount rate to use for an unlevered firm that wants to enter this industry if the risk-free rate is 5 percent and the expected return on the market is 12 percent? Multiple choice question. 12 percent 18.2 percent 12.7 percent 14.8 percent

12.7 percent

If a firm has a capital structure of 40 percent debt and 60 percent equity and the after-tax cost of debt is 10 percent and the cost of equity is 18 percent, what is the WACC? Multiple choice question. 13.2% 14.8 percent 18 percent 10.8%

14.8 percent

According to the security market line (SML), what is the cost of equity capital for a company if the risk-free rate is 2 percent, the market risk premium is 9 percent, and beta is 1.5? Multiple choice question. 3.5 percent 15.5 percent 14.5 percent 11 percent

15.5 percent

Skywalker Corporation wishes to be levered at a debt to value ratio of 0.45. Their cost of debt is 6.5 percent and their tax rate is 24 percent. What is the cost of equity (RS) for BX if their cost of equity as an all-equity firm (R0) is 13 percent? Multiple choice question. 8 percent 15 percent 17 percent 6.5 percent

17 percent

An industry has three firms with unlevered betas of 0.7, 1.1, and 1.6. What is the discount rate to use for an unlevered firm that wants to enter this industry if the risk-free rate is 3 percent and the expected return on the market is 17 percent? Multiple choice question. 20 percent 14.8 percent 18.8 percent 12.7 percent

18.8 percent

British Xeon Corporation (BX) wishes to be levered at a debt to value ratio of 0.6. Their cost of debt is 8 percent and their tax rate is 40 percent. What is the cost of equity (RS) for BX if their cost of equity as an all-equity firm (R0) is 15 percent? Multiple choice question. 21.3 percent 15 percent 28.5 percent 8 percent

21.3 percent

The Blank______ approach to capital budgeting should be used if the project's level of debt is known over the life of the project. Multiple choice question. FTE APV LBO DVD

APV

Which approach to capital budgeting should be used in a lease-versus-buy decision? Multiple choice question. FTE APV WACC

APV

In a __________ _____________, the APV approach is preferred.

Blank 1: leveraged Blank 2: buyout

The Blank______ approach to capital budgeting discounts the after-tax cash flow from a project going to the equity holders of a levered firm. Multiple choice question. WACC APV WAVE FTE

FTE

Typically, which capital budgeting technique(s) is/are used? Multiple select question. FTE APV WACC

FTE WACC

The APV and WACC do not reflect the tax benefit of debt. True false question. True False

False

Typical capital budgeting situations will be more amenable to the APV approach. True false question. True False

False

This approach to capital budgeting calls for discounting the cash flow from the project to the equity holders of the levered firm at the cost of equity capital. Multiple choice question. Flow to Equity (FTE) Net Present Value of Financing Side Effects (NPVF) Weighted Average Cost of Capital (WACC) Adjusted Present Value (APV)

Flow to Equity (FTE)

Which of the following are financing side effects of leverage? Multiple select question. The tax subsidy to dividends The costs of issuing new securities Other subsidies to debt financing The tax subsidy to debt The cost of debt financing The costs of financial distress

The costs of issuing new securities Other subsidies to debt financing The tax subsidy to debt The costs of financial distress

Which of the following are true? Multiple select question. The net present value computation ignores the initial investment. The net present value computation includes all the cash flows. The present value computation ignores the initial investment. The present value computation includes all the cash flows.

The net present value computation includes all the cash flows. The present value computation ignores the initial investment.

How does present value (PV) differ from net present value (NPV)? Multiple choice question. The initial investment is subtracted before calculating the present value. The net present value determines the value of a project before subtracting the initial investment. The present value of a project is determined before the initial investment is subtracted.

The present value of a project is determined before the initial investment is subtracted.

Of the four major financing side effects, which usually has the highest dollar value? Multiple choice question. The costs of issuing new securities Other subsidies to debt financing The costs of financial distress The tax subsidy to debt

The tax subsidy to debt

Which of the following approaches to capital budgeting should be used if the firm's target debt-value ratio applies over the life of the project? Multiple select question. WACC APV LBO FTE

WACC FTE

Subsidized debt allows a company to borrow at Blank______ rate. Multiple choice question. a higher the same a lower

a lower

Leverage increases a firm's equity beta less rapidly under corporate taxes because it creates Blank______. Multiple choice question. a risky tax shield that increases the risk of the entire firm a riskless tax shield that lowers the risk of the entire firm a situation where it is more difficult to analyze a firm's prospects barriers to entry for unlevered competitors

a riskless tax shield that lowers the risk of the entire firm

The weighted average cost of capital is determined by Blank______. Multiple choice question. dividing the weighted average after-tax cost of debt by the weighted average cost of equity adding the weighted average after-tax cost of debt to the weighted average cost of equity multiplying the weighted average after-tax cost of debt by the weighted average cost of equity adding the weighted average before-tax cost of debt to the weighted average cost of equity

adding the weighted average after-tax cost of debt to the weighted average cost of equity

Subsidies to debt financing Blank______ value. Multiple choice question. adds reduces has no effect on

adds

When calculating the cost of equity capital using the security market line, the risk-free rate is added to Blank______. Multiple choice question. the expected return on the market beta times the difference between the expected return on the market and the risk-free rate beta times the difference between the expected return on the market and the cost of debt capital the firm's risk-adjusted cost of capital

beta times the difference between the expected return on the market and the risk-free rate

The net present value of Blank______ is likely to be the sum of the tax effects, flotation costs, bankruptcy costs, and interest subsidies? Multiple choice question. refinancing equity debt float

debt

The value of a project to a levered firm (APV) is Blank______ the value of the project to an unlevered firm (NPV) plus financing side effects (NPVF). Multiple choice question. less than greater than equal to

equal to

The Flow to Equity (FTE) approach to capital budgeting calls for discounting the cash flow from the project to the equity holders of the levered firm at the cost of ______capital.

equity

The costs incurred by a company when it issues new financial securities such as stocks and bonds are known as Blank______. Multiple choice question. debt servicing costs initial costs flotation costs market costs

flotation costs

APV and WACC are similar in that they reflect the tax benefit of Blank______. Multiple choice question. equity leverage relocation waiting

leverage

The tax subsidy to debt has Blank______ value relative to other subsidies to debt financing. Multiple choice question. the same more less

more

With taxes, leverage creates a Blank______ tax shield. Multiple choice question. risky risk-free

risk-free

State and local governments entice businesses to locate in their area by offering Blank______. Multiple select question. low-wage jobs tax credit minimum wage laws rural jobs tax credit manufacturing tax credit job training incentives

rural jobs tax credit manufacturing tax credit job training incentives