23. Which of the following are guidelines for the three methods of capital budgeting with leverage? A. Use APV if project’s level of debt is known over the life of the project. B. Use APV if project’s level of debt is unknown over the life of the project. C. Use FTE or WACC if the firm’s target debt-to-value ratio applies to the project over its life. D. Both A and C. E. Both B and C. 24. An appropriate guideline to adopt when determining the valuation formula to use is: A. never use the APV approach. B. use APV if the project is far different from scale enhancing. C. use WACC if the project is close to being scale enhancing. D. Both A and C. E. Both B and C. 25. In a leveraged buyout the equity holders expect a successful buyout if: A. the firm generates enough cash to serve the debt in early years. B. the company can be taken public or sold in 3 to 7 years. C. the company is attractive to buyers as the buyout matures. D. All of the above. E. None of the above. 26. The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because: A. there is greater risk with a LBO. B. the capital structure is changing. C. there is no tax shield with the WACC. D. the value of the levered and unlevered firms are equal. E. the unlevered and levered cash flows are separated which cannot be used with the WACC approach. 27. The value of a corporation in a levered buyout is composed of which following four parts: A. unlevered cash flows and interest tax shields during the debt paydown period unlevered terminal value and asset sales. B. unlevered cash flows and interest tax shields during the debt paydown period unlevered terminal value and interest tax shields after the paydown period. C. levered cash flows and interest tax shields during the debt paydown period levered terminal value and interest tax shields after the paydown period. D. levered cash flows and interest tax shields during the debt paydown period unlevered terminal value and interest tax shields after the paydown period. E. asset sales unlevered cash flows during the paydown period interest tax shields and unlevered terminal value. 28. If the WACC is used in valuing a leveraged buyout the: A. WACC remains constant because of the final target debt ratio desired. B. flotation costs must be added to the total UCF. C. WACC must be recalculated as the debt is repaid and the cost of capital changes. D. tax shields of debt are not available because the corporation is no longer publicly traded. E. None of the above. 29. The flow-to-equity 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 flow-to-equity approach because they maintain a target debt to value ratio over project lives. The company has a debt to equity ratio of 0.5. 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? A. $170 994 B. $267 628 C. $372 372 D. $543 366 E. $640 000 30. 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%? A. 7.98% B. 10.875% C. 11.000% D. 12.125% E. It is impossible to determine WACC without debt and equity betas. 31. 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? A. 8.38% B. 11.02% C. 12.89% D. 13.00% E. 14.12% 32. 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%? A. $428 571 B. $444 459 C. $565 547 D. $1 000 000 E. None of the above is the correct NPV. 33. The Tip-Top Paving Co. has an equity cost of capital of 16.97%. The debt to value ratio is .6 the tax rate is 34% and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered? A. 0.08% B. 3.06% C. 14.0% D. 16.97% E. None of the above.
