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2) Internal growth rate indicates whether a planned investment will increase or decrease
irm value.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) The sustainable growth rate assumes that the irm will raise no new debt inancing.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
4) Internal growth rate assumes that the irm can inance investments via sale of debt.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) ________ is the maximum growth rate a irm can achieve without resorting to external
inancing.
A) Return on equity
B) Sustainable growth rate
C) Retention rate
D) Internal growth rate
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
21
6) A irm has $50 million in equity and $20 million of debt, it pays dividends of 30% of net
income, and has a net income of $10 million. What is the irm's internal growth rate?
A) 9%
B) 10%
C) 11%
D) 12%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
7) A irm has $40 million in equity and $20 million of debt, it pays dividends of 20% of net
income, and has a net income of $10 million. What is the irm's internal growth rate?
A) 12.2%
B) 13.3%
C) 14.1%
D) 15.2%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
8) A irm has $70 million in equity and $30 million of debt, it pays dividends of 30% of net
income, and has a net income of $10 million. What is the irm's internal growth rate?
A) 6%
B) 7%
C) 8%
D) 9%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
22
9) A irm has $20 million in equity and $20 million of debt, it pays dividends of 20% of net
income, and has a net income of $5 million. What is the irm's sustainable growth rate?
A) 18%
B) 19%
C) 20%
D) 21%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
10) A irm has $50 million in equity and $20 million of debt, it pays dividends of 30% of net
income, and has a net income of $10 million. What is the irm's sustainable growth rate?
A) 12%
B) 13%
C) 14%
D) 15%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11) A irm has $80 million in equity and $40 million of debt, it pays dividends of 20% of net
income, and has a net income of $10 million. What is the irm's sustainable growth rate?
A) 7%
B) 8%
C) 9%
D) 10%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
23
12) A irm expects growth next year to be 12%. Its sustainable growth rate is 10%. Which
of the following is true?
A) The irm will need to raise additional debt such that its debt to equity ratio will increase.
B) The irm may be able to keep its debt to equity ratio the same by reducing dividends
(assuming they are projected to be high enough).
C) The irm will need to raise additional capital through a stock issue.
D) The irm will have excess cash to increase dividends, pay back debt, or repurchase
equity.
AACSB Objective: Relective Thinking Skills
Author: JP
Question Status: Previous Edition
13) A irm expects growth next year to be 10%. Its sustainable growth rate is 12%. Which
of the following is true?
A) The irm will need to raise additional debt such that its debt to equity ratio will increase.
B) The irm may be able to keep its debt to equity ratio the same by reducing dividends
(assuming they are projected to be high enough).
C) The irm will need to raise additional capital through a stock issue.
D) The irm will have excess cash to increase dividends, pay back debt, or repurchase
equity.
AACSB Objective: Relective Thinking Skills
Author: JP
Question Status: Previous Edition
18.5 Valuing the Expansion
1) Total working capital rather than changes in working capital has implications for cash
lows.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) For valuing a planned expansion, in addition to forecasting cash lows we need to
estimate the irm's continuation value.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
24
3) Compute the after-tax interest expense for a irm with Interest on Excess Cash = $1,000,
Interest on Debt = $5,000, and a tax rate of 30%.
A) $2,500
B) $2,800
C) $3,100
D) $3,300
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) Compute the after-tax interest expense for a irm with Interest on Excess Cash = $2,000,
Interest on Debt = $7,000, and a tax rate of 30%.
A) $2,500
B) $2,800
C) $3,100
D) $3,500
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) Compute the after-tax interest expense for a irm with Interest on Excess Cash = $5,000,
Interest on Debt = $8,000, and a tax rate of 30%.
A) $2,100
B) $2,200
C) $2,500
D) $2,700
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
25
6) Given the following data for a given period, compute the free cash low to the irm:
Net Income = $10,000
After-tax Interest Expense = $1,000
Depreciation = $1,000
Increase in NWC = $1,000
Capital Expenditures = $2,000
A) $9,000
B) $9,500
C) $9,700
D) $9,900
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
7) Given the following data for a given period, compute the free cash low to the irm:
Net Income = $12,000
After-tax Interest Expense = $2,000
Depreciation = $1,000
Increase in NWC = $2,000
Capital Expenditures = $1,000
A) $10,000
B) $11,000
C) $12,000
D) $13,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
26
8) Given the following data for a given period, compute the free cash low to the irm:
Net Income = $5,000
After-tax Interest Expense = $500
Depreciation = $500
Increase in NWC = $1,000
Capital Expenditures = $2,000
A) $3,000
B) $3,500
C) $3,700
D) $3,900
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) What is the free cash low to equity holders for a irm with free cash low of $7000, after-
tax interest expense of $1,000, and an increase in debt of $3,000?
A) $6,000
B) $7,000
C) $8,000
D) $9,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
27
10) What is the free cash low to equity holders for a irm with free cash low of $11,000,
after-tax interest expense of $2,000, and an increase in debt of $2,000?
A) $7,000
B) $8,000
C) $9,000
D) $11,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11) What is the free cash low to equity holders for a irm with free cash low of $9,000,
after-tax interest expense of $3,000, and an increase in debt of $1,000?
A) $6,000
B) $7,000
C) $8,000
D) $9,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) The estimate of a irm's value at the end of the forecast horizon using a valuation
multiple is also called its ________.
A) ixed value
B) payback value
C) terminal value
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
28
13) Pledrea Inc. has EBITDA at the forecast horizon of $10,000. Its EBITDA multiple is 11.
What is the terminal value of the irm at the forecast horizon?
A) $100,000
B) $110,000
C) $120,000
D) $130,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
14) Pledrea Inc. has EBITDA at the forecast horizon of $13,000. Its EBITDA multiple is 10.
What is the terminal value of the irm at the forecast horizon?
A) $100,000
B) $110,000
C) $120,000
D) $130,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
15) Pledrea Inc. has EBITDA at the forecast horizon of $10,000. Its EBITDA multiple is 12.
What is the terminal value of the irm at the forecast horizon?
A) $100,000
B) $110,000
C) $120,000
D) $130,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
29
