International Financial Management, 8e (Eun)
1) The financial manager’s responsibility involves
A) increasing the per share price of the company’s stock at any cost and by any means, ways and
fashion that is possible.
B) the shareholder wealth maximization.
C) which capital projects to select.
D) the shareholder wealth maximization and which capital projects to select.
2) Perhaps the most important decisions that confront the financial manager are
A) which capital projects to select.
B) the correct capital structure for the firm.
C) the correct capital structure for projects.
D) none of the options
3) Capital budgeting analysis is very important, because it
A) involves, usually expensive, investments in capital assets.
B) has to do with the productive capacity of a firm.
C) will determine how competitive and profitable a firm will be.
D) all of the options
4) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
What is the unlevered after-tax incremental cash flow for year 0?
A) –$3,660,000
B) –$5,100,000
C) –$4,000,000
D) –$4,010,000
5) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
What is the unlevered after-tax incremental cash flow for year 2?
A) –$4,610
B) $102,300
C) $202,300
D) $255,000
6) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
What is the unlevered after-tax incremental cash flow for year 30?
A) $12,432,300
B) $12,225,390
C) $12,332,300
D) $12,485,000
7) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan
at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 0?
A) −$1,010,000
B) −$1,000,000
C) −$660,000
D) −$2,100,000
8) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan
at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 1?
A) $4,300
B) −$202,610
C) −$95,700
D) $57,000
9) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan
at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 30?
A) $9,027,390
B) $9,234,300
C) $9,134,300
D) $9,287,000
10) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
Assume that the firm will partially finance the project with a subsidized $3,000,000 interest only
30-year loan at 8.0 percent APR with annual payments. Note that eight percent is less than the 10
percent that they normally borrow at. What is the NPV of the loan?
A) $198,469
B) $53,979.83
C) $102,727.55
D) $1,334,851.09
11) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
The firm’s tax rate is 34 percent. The firm’s pre-tax cost of debt is 8 percent; the firm’s
debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm’s common stock is 1.5;
the market risk premium is 9 percent. What is the firm’s cost of equity capital?
A) 33.33 percent
B) 10.85 percent
C) 13.12 percent
D) 16.5 percent
12) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The land
cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction
cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20
office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will
begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are
$75,000 per year. The project will require a $10,000 investment in net working capital.
= 10.0% = 11.20%
= 15.0% tax rate = 34% = 3
= 24.9% = 2%
The firm’s tax rate is 34 percent. The firm’s pre-tax cost of debt is 8 percent; the firm’s
debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm’s common stock is 1.5;
the market risk premium is 9 percent. What is the required return on assets?
A) 33.33 percent
B) 10.85 percent
C) 13.12 percent
D) 16.5 percent
13)
i = rdebt = 6% OCF0 = −$100,000
Ku = rassets = 12% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 27.84% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a maturity
of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero
over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no
other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at
$5; variable costs are $3; there are no fixed costs.
What is the NPV of the project using the WACC methodology?
A) $49,613.03
B) $58,028.68
C) $102,727.55
D) $315,666.16
14)
i = rdebt = 6% OCF0 = −$100,000
Ku = rassets = 12% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 27.84% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a maturity
of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero
over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no
other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at
$5; variable costs are $3; there are no fixed costs.
What is the NPV of the project using the APV methodology?
A) $49,613.03
B) $198,469
C) $102,727.55
D) $149,580.12
15)
i = rdebt = 10% OCF0 = −$100,000
Ku = rassets = 15% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 24.9% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the
5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other
start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.
What is the NPV of the project using the WACC methodology?
A) $58,028.68
B) $49,613.03
C) $48,300.47
D) $102,727.55
16)
i = rdebt = 10% OCF0 = −$100,000
Ku = rassets = 15% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 24.9% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the
5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other
start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.
When using the APV methodology, what is the NPV of the depreciation tax shield?
A) $32,051.52
B) $25,777.35
C) $22,794.65
D) $97,152.98
17)
i = rdebt = 10% OCF0 = −$100,000
Ku = rassets = 15% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 24.9% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the
5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other
start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.
When using the APV methodology, what is the NPV of the interest tax shield?
A) $9,666.51
B) $12,019.32
C) $9,377.31
D) $7,000.73
18) Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be
in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year’s income. The yield to maturity on your firm’s existing debt is 8 percent.
What is the APV of this subsidized loan? If you rounded in your intermediate steps, the answer
may be slightly different from what you got. Choose the closest.
A) −$3,497,224.43
B) $417,201.05
C) $840,797
D) none of the options
19) Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be
in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)
payments over 3 years. The first payment is due December 31, 2009 and your taxes are due
January 1 of each year on the previous year‘s income. The yield to maturity on your firm’s existing
debt is 8 percent. What is the APV of this subsidized loan? Note that I did not round my
intermediate steps. If you did, your answer may be off by a bit. Select the answer closest to yours.
A) −$3,497,224.43
B) $417,201.05
C) $840,797
D) none of the options
20) The required return on assets is 18 percent. The firm can borrow at 12.5 percent; firm’s target
debt to value ratio is 3/5. The corporate tax rate is 34 percent, and the risk-free rate is 4 percent and
the market risk premium is 9.2 percent.
What is the weighted average cost of capital?
A) 12.15 percent
B) 13.02 percent
C) 14.33 percent
D) 23.45 percent
21) Your firm is in the 34 percent tax bracket. The yield to maturity on your existing bonds is 8
percent. The state of Georgia offers to loan your firm $1,000,000 with a two year amortizing loan
at a 5 percent rate of interest and annual payments due at the end of the year.
The interest will be deductible at the time that you pay. What is the APV of this below-market loan
to your firm? I did not round any of my intermediate steps. You might be a little bit off. Pick the
answer closest to yours.
A) $64,157.38
B) $417,201.05
C) $840,797
D) none of the options
22) The firm’s tax rate is 34 percent. The firm’s pre-tax cost of debt is 8 percent; the firm’s
debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm’s common stock is 1.5;
the market risk premium is 9 percent. Calculate the weighted average cost of capital.
A) 33.33 percent
B) 8.09 percent
C) 9.02 percent
D) 16.5 percent
23) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.
Using the weighted average cost of capital methodology, what is the NPV? I didn’t round my
intermediate steps. If you do, you’re not going to get the right answer.
A) −$1,406,301.25
B) $12,494,643.75
C) $36,580,767.55
D) $108,994.618.20
24) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.
What is the levered after-tax incremental cash flow for year 2?
A) $185,796,000
B) $215,152,000
C) $267,952,000
D) $284,848,000
25) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.
What is the levered after-tax incremental cash flow for year 4?
A) $281,704,000
B) $465,152,000
C) −$194,848,000
D) $460,796,000
26) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.
Using the flow to equity methodology, what is the value of the equity claim?
A) −$1,540,000
B) $446,570,866.00
C) $36,580,767.55
D) $470,953,393.70
27) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.
Using the APV method, what is the value of this project to an all-equity firm?
A) −$46,502,288.10
B) $12,494,643.75
C) $36,580,767.55
D) −$67,163,445.12
28) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.
Using the APV method, what is the value of the debt side effects?
A) $239,072,652.70
B) $66,891,713.66
C) $59,459,301.03
D) $660,000,000
29) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.
Using the weighted average cost of capital methodology, what is the NPV? I didn’t round my
intermediate steps. If you do, you’re not going to get the right answer.
A) −$1,406,301.25
B) $12,494,643.75
C) $36,580,767.55
D) $108,994.618.20
30) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.
What is the levered after-tax incremental cash flow for year 2?
A) $185,796,000
B) $215,152,000
C) $267,952,000
D) $284,848,000
31) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.
What is the levered after-tax incremental cash flow for year 4?
A) −$281,704,000
B) $465,152,000
C) −$194,848,000
D) $460,796,000
32) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm’s tax rate is 34 percent; the firm’s bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.
Using the flow to equity methodology, what is the value of the equity claim?
A) −$1,540,000
B) $446,570,866.00
C) $36,580,767.55
D) $30,716,236.13