1-Fords equity Is worth $50 per share, and there are 1 billion shares outstanding. Ford has issued bonds—each bond trades at $1000 and there are .2 billion bonds outstanding. Finally, ford has $20 billion worth of excess cash on its balance sheet. When computing fords WACC, what should you use for D/V?
.8
.74
.88
.78
2- ford and gm are in the same industry and their operations have identical risk. Ford, however has a lower wacc than gm. Both firms are evaluating a project that will generate identical free cash flows for both companies. Which company will create more value from the interest tax shields as a result of the project? Assume all the assumptions of wacc are met, and that both companies use at least some debt financing.
Ford
Gm
The interest tax shields from the project will be worth the same for both companies
Not enough information
3- dell is considering a change to their capital structure. In the past, dell maintained a stable d/e ratio of ¼. Going forward, dell is considering maintaining a stable d/e ratio of ¾. Assuming the cost of debt stays the same after the change, what will happen to dells wacc? What will happen to the required return on the dells equity?
The WACC will decrease but the equity will increase
The wacc and equity will increase
The wacc will increase but the equity will decrease
Both decrease
4- apple has multiple divisions: a phone division, a computer division, and an entertainment division. The systematic risk of each division is different. However, every project is financed with the same mix of debt and equity regardless of the projects division, and apple maintains a constant d/e ratio. Apples wacc is therefore the appropriate discount rate for projects in each of the three divisions.
True or false
5- hp maintains a constant d/e ratio of ¼. The expected return on hps debt is 5%, the expected return on hps equity is 15% and hps tax rate is 30%. What is the expected return on hps operations that is, what would be hps expected return if it was financed with all equity?
15%
12.7%
13%
5%
6- kellog makes breakfast cereals. Assets in the breakfast cereal business have a beta of .5. the risk-free rate is 3% and the market risk premium is 6%. On the financing side, Kellogg has a constant d/e ration of 1/1, and the expected return on kelloggs debt is 4%. Find the expected return on kelloggs equity.
10%
4%
8%
6%
7- what is not a typical use of the de-levering and re-levering procedure?
Estimating the costs of financial distress from too much leverage
Learning from other companies to improve the estimate of your company’s discount rate
Calculating a company’s discount rate after a change in its capital structure
Inferring a discount rate for a private company
8- general mills makes breakfast cereals. You know the operations of the business have an expected return of 6%. The company has a stable d/e ratio of ¼ with a cost of equity equal to 6.5% and a cost of debt equal to 4%. Suppose general mills shifts their d/e ration to 2/1 permanently. If the cost of debt stays at 4%, what will be the new required return on equity after the change in capital structure?
10%
8%
6%
6.5%
9- there are two steps when implementing apv. First find the value of the operations of the project then find the value of the interest tax shields. How does the value of the operations change the projects financing?
More debt makes value decrease
More debt will have no effect on value
The effect of debt on value depends on the discount rate for the tax shield
More debt makes value increase
10- you work for a condominium developer. When the developer starts on a building, they use a substantial amount of debt to finance construction. As the developer sells the units, they pay down the debt. You are evaluating a new building and need to use apv. You know the following about the developer: the expected return on the assets is 15%: the return on the equity is 22%: the return on the debt is 8%: the tax rate is 25%. What rate should you use to discount the interest tax shields from the new building?
15%
6%
8%
33%
11-you work for Microsoft. Until recently, Microsoft was financed entirely with equity and had no debt. While Microsoft was financed with all equity, its stock had a beta of 2. The risk-free rate is 4% and the market risk premium is 6%. Recently, however, Microsoft capital structure has been fluctuating. Microsoft assts and operations have not changed, but microsoft has been steadily increasing their d/e ratio and has issued preferred equity as well. The ytm on microsofts debt is 5%; the tax rate is 20%; the require return on preferred equity is 8%. Given these changes, you want to use apv to evaluate projects. What rate should you use to discount a projects fcf in the apv method?
4%
16%
5%
8%
12-which of the following does not correctly describe a strength of the stated valuation method?
Wacc is simple and works well when a firm maintains a constant d/e ratio
All of the other options correctly describe a strength of the stated method
APV is flexible and well suited to firms with changing d/e ratios
FTE works well with the financial institutions where it is difficult to separate operating activities from financing activites
13-when using the flow to equity method, what is the appropriate discount rate for the free cash flows to equity?
Cost of the unlevered equity
Weighted average cost of capital
Cost of assets
Cost of levered equity
14-kroger has a free cash flow to equity of $250 this year. It also has a free cash flow of $350, pays $100 in interest on its debt, and has a tax rate of 20%. How much net debt did Kroger issue?
0
-50
-20
20
15-airbnb is preparing to sell equity on the stock market for the first time. As the company is currently private, it is difficult to know the appropriate price to sell shares. Airnb does have accounting data, through, and currently it records sales of $10 billion per year. When uber went and sold equity on the stock market for the first time, it traded at an ev/sales multiple of 3. What is the implied ev of Airbnb?
$3.3 billion
$13 billion
$10 billion
$30 billion
16- what is not an advantage of using an exit multiple instead of a growing perpetuity when calculating a terminal value?
The multiple does not require an assumption about the terminal growth rate of the firm
The multiple is easy to calculate
The multiple promotes herding and trend-chasing
The multiple uses the market consensus, which contains a lot of info
17-you work as venture capitalist and focus on first stage deals in the biotechnology industry. Your typical hurdle rate when evaluating firms is 60%. What does not contribute to this hurdle rate?
The firm-specific “casino” risk of the firm
The systematic risk of the firm
The fees you charge your investors
The firm has a high probability of failure, but the cash-flow projections assume survival
18- entrepreneurs know much more about their project and intentions than investors. How can venture capitalists avoid investing in entrepreneurs who have conflicts of interest with investors?
VCs can advise the entrepreneur on the state of the industry
VCs can provide capital to the entrepreneur
VCs can write contracts that only optimistic and hard-working entrepreneurs would sign
VCs can introduce the entrepreneur to potential suppliers, customers, and personnel
19-when we violate one of Modigliani and millers assumptions, we see that capital structure can affect firm value. Which of the violations encourage firms to use equity instead of debt?
Information asymmetry between investors and management leads to the pecking order theory
Conflicts of interest between debt holders and equity holders
Interest expense creates a tax deduction
20- what is not a way self-interested equity holder will choose to destroy firm value?
Liquidating dividends
Debt overhang
Offering collateral to secure a loan
Risk-shifting
