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Exam 19: Financing and Valuation

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Question 1

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If expected long-term growth is constant, the firm's horizon value at period H is given by PVH = (FCF_{H + 1})/(WACC − g).

A) True
B) False

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Question 2

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When calculating the WACC for a firm, one should use the book values of debt and equity.

A) True
B) False

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Question 3

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Mirion, Inc., has a debt-equity ratio of 50 percent, with no preferred stock. However, Mirion now plans to raise enough preferred stock to retire half of its outstanding common stock. Its common equity is currently valued at $7 million. Which of the following choices displays Mirion's market value capital structure, in market values (i.e., V = D + P +E) , after the preferred stock issue?

The Granite Paving Company is all-equity financed and has the following free cash flows in years 1−4: $3 million ($3M) ; $3.7M; $4M; $4.2M. After year 4, the firm is expected to grow at a sustainable rate of 3 percent per annum. With a WACC of 12 percent, what is the horizon value in year 4 of Granite Paving Co?

Generally, APV is not suitable for international projects.

Briefly explain how APV can be used for valuing a business.

Consider the following data: FCF₁ = $7 million; FCF₂ = $45 million; FCF₃ = $55 million. Assume that free cash flow grows at a rate of 4 percent for year 4 and beyond. If the weighted average cost of capital is 10 percent, calculate the value of the firm.

The 1-year bonds of Casino, Inc., have a 12 percent coupon rate and trade in the market at a yield of 14 percent. There is a 5 percent chance that Casino will default and pay nothing. What cost of debt should be used in Casino's WACC?

Under which circumstances would it be better to use the adjusted present value approach versus the WACC approach?

Mirion Tech, Inc., has r_E of 12%, an r_D of 6%, at a debt-equity ratio of 0.50. Mirion plans to raise enough preferred stock to retire half of their outstanding common stock, which currently has a market value of $7 million. If the preferred stock has an expected rate of return of 10%, what is the new WACC? (Assume a 21% marginal corporate tax rate and that r_D remains at 6%.)

The computation of a firm's WACC does not change after it issues preferred stock.

The WACC formula calculates the cost of capital for the "average risk" project.

Briefly explain how WACC can be used for valuing a business.

The market value of short-term debt is very close to the book value of debt for healthy firms.

Given are the following data for Outsource Company: PV (of FCFs for years 1-3) = $35 million; PV (horizon value) = $65 million. Suppose that the market value of the debt = $30 million. Calculate the total market value of equity of the firm.

Briefly explain how the firm's equity beta changes with changes in its debt-equity ratio when taxes are considered.

Given are the following data for Vinyard Corporation: Calculate the proportions of debt (D/V) and equity (E/V) that you would use for estimating Vinyard's weighted average cost of capital (WACC) .

"Urban renewal can be assisted by the provision of government tax and loan incentives to businesses, despite the existence of negative NPV projects." Explain why this may be true.

Capital budgeting projects that incorporate both investment and financing decision side effects can be properly analyzed by: I.adjusting the project's present value (APV) ; II.adjusting the project's discount rate (WACC) ; III.relying only on MM Propositions I and II

Which of the following is an important assumption required if using the WACC formula?