Chapter 17: Dynamic Capital Structures and Corporate Valuation
DIFFICULTY:
Difficulty: Easy
1. The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm’s operations if
it had no debt.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Capital structure: Unlevered value
KEYWORDS:
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
2. In a world with no taxes, MM show that a firm’s capital structure does not affect the firm’s value. However, when taxes
are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
HAS VARIABLES:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
TOPICS:
Taxes and capital structure
KEYWORDS:
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
3. According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt
financing.
a.
True
b.
False
ANSWER:
False
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.02 – LO: 17-2
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – ak – DISC: Capital structure
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
DATE MODIFIED:
1/6/2018 11:33 PM
4. MM showed that in a world with taxes, a firm’s optimal capital structure would be almost 100% debt.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.02 – LO: 17-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
DATE CREATED:
10/30/2017 8:12 PM
1/6/2018 11:33 PM
5. MM showed that in a world without taxes, a firm’s value is not affected by its capital structure.
a.
True
b.
False
ANSWER:
True
HAS VARIABLES:
False
IFMG.DAVE.19.17.02 – LO: 17-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – ak – DISC: Capital structure
United States – OH – Default City – TBA
TOPICS:
Taxes and capital structure
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
Chapter 17: Dynamic Capital Structures and Corporate Valuation
DIFFICULTY:
Difficulty: Moderate
Kitto Electronics Data
Kitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto
must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company
with no debt has a cost of equity of 11%.
6. Refer to data for Kitto Electronics. According to the compressed adjusted present value model, what is Kitto’s
unlevered value?
a.
$1,296,000
b.
$1,440,000
c.
$1,600,000
d.
$1,760,000
e.
$1,936,000
ANSWER:
FCF
= NOPAT − Net investment in operating assets
= $200,000(0.60) − $200,000(0.20)
= $120,000 − $40,000 = $80,000
= $80,000/(0.11 − 0.06)
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Kitto Electronics Data
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.03 – LO: 17-3
NATIONAL STANDARDS:
STATE STANDARDS:
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
TOPICS:
KEYWORDS:
OTHER:
together.
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
7. In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the unlevered cost of
equity.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
QUESTION TYPE:
LEARNING OBJECTIVES:
8. In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the WACC.
a.
True
b.
False
ANSWER:
False
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
Compressed APV: discount rate
KEYWORDS:
DATE CREATED:
1/6/2018 11:33 PM
9. Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach
is most CORRECT?
a.
The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings
at the cost of debt.
b.
The horizon value is calculated by discounting the expected earnings at the WACC.
c.
The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings
at the WACC.
d.
The horizon value must always be more than 20 years in the future.
e.
The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings
at the levered cost of equity.
ANSWER:
c
HAS VARIABLES:
False
IFMG.DAVE.19.17.03 – LO: 17-3
NATIONAL STANDARDS:
STATE STANDARDS:
United States – OH – Default City – TBA
TOPICS:
DATE CREATED:
DATE MODIFIED:
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.04 – LO: 17-4
United States – BUSPROG: Analytic
10. In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the after-tax cost of
debt.
a.
True
b.
False
ANSWER:
False
1
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.03 – LO: 17-3
United States – BUSPROG: Reflective Thinking
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
Compressed APV: Discount rate
KEYWORDS:
10/30/2017 8:12 PM
1/6/2018 11:33 PM
11. Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)
approach is most CORRECT?
a.
The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at
the cost of equity.
b.
The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows
before the horizon date at the unlevered cost of equity.
c.
The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
d.
The CAPV approach stands for the accounting pre-valuation approach.
e.
The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows
at the cost of equity.
ANSWER:
b
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
Merger analysis
OTHER:
TYPE: Multiple Choice: Conceptual
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
1
HAS VARIABLES:
False
12. If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date,
then the compressed adjusted present value model calculates the horizon value by discounting the post-horizon free cash
flows and post-horizon expected future tax shields at the weighted average cost of capital.
a.
True
b.
False
False
POINTS:
1
DIFFICULTY:
Difficulty: Challenging
True / False
HAS VARIABLES:
False
IFMG.DAVE.19.17.04 – LO: 17-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – ak – DISC: Capital structure
United States – OH – Default City – TBA
TOPICS:
Merger analysis
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
Sallie’s Sandwiches
Sallie’s Sandwiches is financed using 20% debt at a cost of 8%. Sallie projects combined free cash flows and interest tax
savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 value
includes the combined horizon values of FCF and tax shields.) All cash flows are expected to grow at a 3% constant rate
after Year 4. Sallie’s beta is 2.0, and its tax rate is 34%. The risk-free rate is 8%, and the market risk premium is 4%.
13. Using the data for Sallie’s Sandwiches and the compressed adjusted present value model, what is the appropriate rate
for use in discounting the free cash flows and the interest tax savings?
a.
12.0%
b.
13.9%
c.
14.4%
d.
16.0%
e.
16.9%
ANSWER:
c
LOCAL STANDARDS:
United States – OH – Default City – TBA
Merger analysis
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
1
DIFFICULTY:
QUESTION TYPE:
False
PREFACE NAME:
IFMG.DAVE.19.17.04 – LO: 17-4
NATIONAL STANDARDS:
STATE STANDARDS:
United States – OH – Default City – TBA
TOPICS:
OTHER:
NOTES:
14. Using the data for Sallie’s Sandwiches and the compressed adjusted present value model, what is the total value (in
millions)?
a.
$72.37
b.
$73.99
c.
$74.49
d.
$75.81
e.
$76.45
ANSWER:
e
PREFACE NAME:
IFMG.DAVE.19.17.04 – LO: 17-4
NATIONAL STANDARDS:
STATE STANDARDS:
United States – OH – Default City – TBA
TOPICS:
OTHER:
NOTES:
10/30/2017 8:12 PM
DATE MODIFIED:
Chapter 17: Dynamic Capital Structures and Corporate Valuation
Copyright Cengage Learning. Powered by Cognero.
Page 8
Glassmaker Corporation Data
Glassmaker Corporation has a current capital structure consisting of $5 million (market value) of 11% bonds and $10
million (market value) of common stock. Glassmaker’s beta is 1.36. Glassmaker faces a 40% tax rate. Glassmaker plans
on making big changes in operation and capital structure during the next several years. (Its tax rate will remain
unchanged.) Under these plans, the free cash flows for Glassmaker are estimated to be $3.0 million for each of the next 4
years; the horizon value of the free cash flows (discounted at the rate assumed by the compressed adjusted present value
(CAPV) approach) is $10.0 million at Year 4. The estimated tax savings due to interest expenses are estimated to be $1
million for each of the next 4 years; the horizon value of the tax shields (discounted at the rate assumed by the CAPV
approach) is estimated to be $5 million at Year 4. Glassmaker has no nonoperating assets. Currently, the risk-free rate is
6.0% and the market risk premium is 4.0%.
15. Refer to data for Glassmaker Corporation. What is Glassmaker’s WACC, based on its current capital structure?
a.
9.02%
b.
9.50%
c.
9.83%
d.
10.01%
e.
11.29%
ANSWER:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
PREFACE NAME:
Glassmaker Corporation
IFMG.DAVE.19.17.06 – LO: 17-6
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – ak – DISC: Capital structure
United States – OH – Default City – TBA
TOPICS:
Compressed APV: current WACC of company
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to preface for Glassmaker Corporation MUST be kept together.
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
16. Refer to data for Glassmaker Corporation. According to the compressed adjusted present value model, what
discount rate should you use to discount Glassmaker’s free cash flows and interest tax savings?
a.
10.01%
b.
10.06%
c.
11.29%
d.
11.44%
e.
13.49%
DATE MODIFIED:
1/6/2018 11:33 PM
Chapter 17: Dynamic Capital Structures and Corporate Valuation
ANSWER:
1
DIFFICULTY:
QUESTION TYPE:
False
PREFACE NAME:
IFMG.DAVE.19.17.06 – LO: 17-6
NATIONAL STANDARDS:
STATE STANDARDS:
United States – OH – Default City – TBA
TOPICS:
OTHER:
NOTES:
10/30/2017 8:12 PM
DATE MODIFIED:
17. Refer to data for Glassmaker Corporation. Using the compressed adjusted present value model, what will
Glassmaker’s value of equity be if it successfully implements its planned changes in operations and capital structure?
(Round your answer to the closest thousand dollars.)
a.
$16,019,000
b.
$17,111,000
c.
$18,916,000
d.
$22,111,000
e.
$22,916,000
ANSWER:
b
POINTS:
Copyright Cengage Learning. Powered by Cognero.
Page 10
18. Which of the following statements concerning the compressed adjusted present value (APV) model is NOT
CORRECT?
a.
The value of a growing tax shield is greater than the value of a constant tax shield.
b.
For a given D/S, the levered cost of equity using the compressed APV model is greater than the levered cost of
equity under MM’s original (with tax) assumptions.
c.
For a given D/S, the WACC in the compressed APV model is less than the WACC under MM’s original (with
tax) assumptions.
d.
The total value of the firm increases with the amount of debt.
e.
The tax shields should be discounted at the unlevered cost of equity.
ANSWER:
c
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.03 – LO: 17-3
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – ak – DISC: Capital structure
United States – OH – Default City – TBA
TOPICS:
Compressed APV: Discount rate
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:12 PM
1/6/2018 11:33 PM
19. Which of the following statements concerning the compressed adjusted present value (APV) model is NOT
CORRECT?
a.
The value of a growing tax shield is greater than the value of a constant tax shield.
b.
For a given D/S, the levered cost of equity is greater in the compressed APV model than the levered cost of
equity under MM’s original (with tax) assumptions.
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
PREFACE NAME:
Glassmaker Corporation
IFMG.DAVE.19.17.06 – LO: 17-6
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Compressed APV model: Value of equity
OTHER:
TYPE: Multiple Choice: Multi-part
The problems referring to preface for Glassmaker Corporation MUST be kept together.
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
Chapter 17: Dynamic Capital Structures and Corporate Valuation
Copyright Cengage Learning. Powered by Cognero.
Page 11
c.
For a given D/S, the WACC is greater in the compressed APV model than the WACC under MM’s original
(with tax) assumptions.
d.
The total value of the firm increases with the amount of debt.
e.
The tax shields should be discounted at the cost of debt.
ANSWER:
e
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.03 – LO: 17-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
20. Which of the following statements concerning the compressed adjusted present value (APV) model is NOT
CORRECT?
a.
The value of a growing tax shield is greater than the value of a constant tax shield.
b.
For a given D/S, the levered cost of equity in the compressed APV model is greater than the levered cost of
equity under MM’s original (with tax) assumptions.
c.
For a given D/S, the WACC in the compressed APV model is greater than the WACC under MM’s original
(with tax) assumptions.
d.
The total value of the firm is independent of the amount of debt it uses.
e.
The tax shields should be discounted at the unlevered cost of equity.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.03 – LO: 17-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Compressed APV: General concepts
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
21. The market value of Firm L’s debt is $200,000 and its yield is 9%. The firm’s equity has a market value of $300,000,
Chapter 17: Dynamic Capital Structures and Corporate Valuation
Debt: $200,000
Equity: $300,000
g: 5%
POINTS:
1
its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%.
Using the compressed adjusted present value model, what is Firm L’s cost of equity?
a.
11.4%
b.
12.0%
c.
12.6%
d.
13.3%
e.
14.0%
ANSWER:
e
Debt: $200,000
Equity: $300,000
g: 5%
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.06 – LO: 17-6
STATE STANDARDS:
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
DATE CREATED:
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
22. The market value of Firm L’s debt is $200,000 and its yield is 9%. The firm’s equity has a market value of $300,000,
its earnings are growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%.
Using the compressed adjusted present value model, what would Firm L’s total value be if it had no debt?
a.
$358,421
b.
$377,286
c.
$397,143
d.
$417,000
e.
$437,850
ANSWER:
Copyright Cengage Learning. Powered by Cognero.
Page 13
23. A local firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and
its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Using the compressed adjusted present value
model, what is the value of your firm’s tax shield, i.e., how much value does the use of debt add?
a.
$92,571
b.
$102,857
c.
$113,143
d.
$124,457
e.
$136,903
b
Debt: $200,000
Equity: $300,000
1
Difficulty: Moderate
False
IFMG.DAVE.19.17.04 – LO: 17-4
United States – ak – DISC: Capital structure
Compressed APV: Valuation
10/30/2017 8:12 PM
Kitto Electronics Data
Kitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto
must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company
with no debt has a cost of equity of 11%.
Multiple Choice
False
IFMG.DAVE.19.17.04 – LO: 17-4
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TYPE: Multiple Choice: Problem
1/6/2018 11:33 PM
POINTS:
1
Difficulty: Moderate
False
24. Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is the value of Kitto’s
tax shield?
a.
$156,385
b.
$164,616
c.
$173,280
d.
$182,400
e.
$192,000
ANSWER:
e
Debt: $300,000
g: 6%
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
False
PREFACE NAME:
Kitto Electronics Data
IFMG.DAVE.19.17.06 – LO: 17-6
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – ak – DISC: Capital structure
LOCAL STANDARDS:
United States – OH – Default City – TBA
Compressed APV: Valuation
OTHER:
TYPE: Multiple Choice: Multi-part
The problems referring to preface for Kitto Electronics Data MUST be kept together.
DATE CREATED:
10/30/2017 8:12 PM
1/6/2018 11:33 PM
25. Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is Kitto’s value of
equity?
a.
$1,492,000
b.
$1,529,300
c.
$1,567,533
d.
$1,606,721
e.
$1,646,889
ANSWER:
Copyright Cengage Learning. Powered by Cognero.
Page 15
26. The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm
because it incorporates the actual capital structure of the new firm.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.17.03 – LO: 17-3
United States – BUSPROG: Reflective Thinking
analysis
United States – OH – Default City – TBA
TOPICS:
Discount rate in a merger analysis
DATE CREATED:
10/30/2017 8:17 PM
DATE MODIFIED:
1/6/2018 11:33 PM
27. Raymond Supply, a national hardware chain, is considering purchasing a smaller chain, Strauss & Glazer Parts (SGP).
Raymond’s analysts project that the merger will result in the following incremental free cash flows, tax shields, and
horizon values:
Year
1
2
3
4
Free cash flow
$1
$3
$3
$7
Unlevered horizon value
75
Tax shield
1
1
2
3
Horizon value of tax shield
32
Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The
acquisition would be made immediately, and if it is undertaken, SGP would retain its current $15 million of debt and issue
enough new debt to continue at the 30% target level. The interest rate would remain the same. SGP’s pre-merger beta is
2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. Using the
compressed adjusted present value approach, what is the value of SGP to Raymond?
a.
$53.40 million
b.
$61.96 million
PREFACE NAME:
Kitto Electronics Data
IFMG.DAVE.19.17.06 – LO: 17-6
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – ak – DISC: Capital structure
United States – OH – Default City – TBA
TOPICS:
Compressed APV: Value of equity
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to preface for Kitto Electronics Data MUST be kept together.
10/30/2017 8:12 PM
DATE MODIFIED:
1/6/2018 11:33 PM
Chapter 17: Dynamic Capital Structures and Corporate Valuation
Copyright Cengage Learning. Powered by Cognero.
Page 16
c.
$64.64 million
d.
$76.96 million
e.
$79.64 million
ANSWER:
b
POINTS:
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.17.03 – LO: 17-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
Value of an acquisition
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:17 PM
28. Volunteer Enterprises has the following information for the current year. Calculate its free cash flow to equity.
FCF
1,000
Interest expense
40
Principal payments
200
New debt
300
Tax rate
25%
a.
$1,070
Chapter 17: Dynamic Capital Structures and Corporate Valuation
FCF
Interest expense
36
Interest rate x debt
b.
$1,177
c.
$1,295
d.
$1,424
e.
$1,567
ANSWER:
Less after-tax interest
QUESTION TYPE:
LEARNING OBJECTIVES:
analysis
TOPICS:
DATE CREATED:
29. Gators Incorporated has the following information for the current year and projected for next year. Calculate its
projected free cash flow to equity.
Current
year
Projected
FCF
NA
1,000
Total debt
400
600
Interest rate on debt
6%
6%
Tax rate
25%
25%
a.
$1,066
b.
$1,173
c.
$1,290
d.
$1,419
e.
$1,561
ANSWER:
b
Copyright Cengage Learning. Powered by Cognero.
Page 18
30. Gamma Pharmaceuticals has the following financial information for the current year and projected for next year.
Calculate Gamma’s projected free cash flow to equity.
Current
year
Projected
NOPAT
NA
1,000
Total operating capital
2,000
2,200
Total debt
900
800
Interest rate on debt
6%
6%
Tax rate
25%
25%
a.
$549
b.
$604
c.
$664
d.
$730
e.
$803
ANSWER:
c
NOPAT
27
Interest expense x (1 – T)
Net new debt
Increase in debt.
FCFE
FCF – after-tax interest expense + increase in debt
DIFFICULTY:
HAS VARIABLES:
CTIVES:
TOPICS:
DATE CREATED: