32) Jensen’s has a total value of $548,000 and debt valued at $262,000. What is the weighted
average cost of capital if the aftertax cost of debt is 7.2 percent and the cost of equity is 12.6
percent?
A) 11.13 percent
B) 10.88 percent
C) 10.02 percent
D) 12.13 percent
E) 11.48 percent
33) Filter Corp. maintains a debt-equity ratio of .45. The cost of equity is 14.7 percent, the pretax
cost of debt is 8.1 percent, and the tax rate is assumed to be 23 percent. What is the weighted
average cost of capital?
A) 8.38 percent
B) 11.02 percent
C) 12.07 percent
D) 13.00 percent
E) 14.12 percent
34) Webster Corp. is planning to build a new shipping depot. The initial cost of the investment is
$1.18 million. Efficiencies from the new depot are expected to reduce aftertax annual costs by
$105,000 forever. The corporation has a total value of $62.4 million and has outstanding debt of
$38.7 million. What is the NPV of the project if the firm has an aftertax cost of debt of 5.8
percent and a cost equity of 12.6 percent?
A) $72,581
B) $46,509
C) $163,669
D) −$102,422
E) −$531,736
35) A project has an initial cost of $480,000, projected revenue of $311,500, cash costs of
$214,650, an unlimited life, a tax rate of 21 percent, and a weighted average cost of capital of
13.8 percent. What is the net present value of the project?
A) $24,411
B) $115,494
C) $100,003
D) $66,497
E) $74,431
36) NDS Industries is evaluating a project with an initial investment at Time 0 of $640,000. The
present value of the levered cash flows is $729,400 and the net present value of the project is
$157,000. Using the flow-to-equity method of valuation determine the amount borrowed.
A) $89,400
B) $246,400
C) $67,600
D) $54,300
E) $64,000
37) Blue Water Boats is considering a new project with perpetual revenue of $435,000, cash
costs of $310,000, and a tax rate of 21 percent. The firm plans to issue $250,000 of debt at an
interest rate of 7.3 percent to help finance the initial project cost of $475,000. The levered
discount rate is 16.7 percent. What is the net present value of this project?
A) $279,985
B) $284,022
C) $128,211
D) −$59,506
E) −$168,424
38) Beau Markets has a beta of 1.12, a cost of debt of 8.6 percent, and a debt-to-value ratio of .6.
The current risk-free rate is 3.22 percent and the market rate of return is 14.47 percent. What is
the company’s cost of equity capital?
A) 12.97 percent
B) 10.95 percent
C) 15.82 percent
D) 11.49 percent
E) 13.96 percent
39) Alabaster Incorporated wants to be levered at a debt-to-value ratio of .6. The cost of debt is 9
percent, the tax rate is 21 percent, and the cost of equity for an all-equity firm is 12 percent.
What will be the firm’s cost of equity?
A) 12.31 percent
B) 16.45 percent
C) 12.08 percent
D) 15.56 percent
E) 13.58 percent
40) Winston’s has a beta of 1.08 and a cost of debt of 8 percent. The current risk-free rate is 3.2
percent and the market rate of return is 11.47 percent. What is the company’s cost of equity
capital?
A) 8.93 percent
B) 16.93 percent
C) 12.13 percent
D) 20.13 percent
E) 16.13 percent
41) TTC is planning to raise $3.25 million for three years at an interest rate of 7.35 percent to
finance their expansion. The Alban County Board of Commissioners has just offered the firm the
$3.25 million they need at 5.25 percent if the firm builds in Alban County, pays the interest
annually, and repays the principal at the end of three years. What is the net present value of the
loan to TTC if the firm’s tax rate is 21 percent and it accepts the county’s offer?
A) $293,651
B) $212,100
C) $271,405
D) $186,416
E) $346,090
42) BT Corporation has decided to build a new facility for its R&D department. The cost of the
facility is estimated at $125 million. The firm plans to finance this project using its traditional
debt-equity ratio of .65. The issue cost of equity is 6.1 percent and the issue cost of debt is 1.8
percent. What is the amount of the total flotation cost?
A) $5,507,576
B) $6,003,121
C) $6,138,412
D) $5,761,428
E) $6,202,418
43) A project has an unlevered NPV of $1.5 million. To finance the project, debt is being issued
with associated flotation costs of $60,000. The flotation costs can be amortized over the project’s
5-year life. The debt of $10 million is being issued at the market interest rate of 10 percent paid
annually, with principal repaid in a lump sum at the end of the fifth year. If the firm’s tax rate is
21 percent, calculate the project’s APV.
A) $2,441,107
B) $1,494,028
C) $2,384,312
D) $2,245,618
E) $1,909,417
44) Kelly Industries is given the opportunity to raise $5 million in debt for four years through a
local government subsidized program. While Kelly would normally be required to pay 12
percent on its debt issues, the Hampton County program sets the rate at 9 percent. What is the
NPV of this subsidized loan? Ignore taxes.
A) $518,364
B) $296,007
C) $384,312
D) $455,602
E) $0
45) A global conglomerate has a debt beta of zero. If the cost of equity is 12.23 percent, and the
risk-free rate is 4.36 percent, what is the firm’s pretax cost of debt?
A) 4.36 percent
B) 8.30 percent
C) 7.87 percent
D) 0 percent
E) 12.23 percent
46) Alpha Company has riskless debt, a debt-equity ratio of .46, a tax rate of 21 percent, and an
unlevered firm beta of 1.23. What is the equity beta?
A) .67
B) .73
C) .86
D) 1.68
E) 1.47
47) Kelso’s is valued at $5.8 million, has riskless debt of $2.3 million outstanding, and has an
equity beta of 1.81. What is the asset beta if there are no taxes?
A) 1.11
B) 1.86
C) 1.15
D) 1.09
E) 1.71
48) The Boat Company has a capital structure of 30 percent riskless debt and 70 percent equity.
The assumed tax rate is 23 percent. If the asset beta is .9, what is the equity beta?
A) .63
B) .41
C) 1.20
D) 1.26
E) 1.49
49) Banisters is valued at $8.6 million and has debt of $2.1 million outstanding. The unlevered
firm beta is 1.72, and the tax rate is 21 percent. What is the levered equity beta?
A) .86
B) 1.18
C) 2.16
D) 1.98
E) 1.30
50) Webster’s latest project has an initial cost of $1.23 million and unlevered perpetual cash
flows of $238,000. The firm has a debt-equity ratio of .42, a pretax cost of debt of 7.6 percent, a
cost of equity of 13.3 percent, and a tax rate of 21 percent. What is the NPV of the project?
A) $864,010
B) $887,982
C) $906,056
D) $909,411
E) $892,020
51) Explain why the flow to equity approach uses levered, not unlevered, cash flows.
52) Discuss the adjusted present value, the flow to equity, and the weighted average cost of
capital methods of capital budgeting with leverage and the guidelines for using each method.
53) Explain how flotation costs affect the analysis of a levered project.
54) Assume a project is non-scale enhancing. Describe the basic steps required to determine the
net present value of the project.