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Mfin finance exam 2 tulane _ latest questions and answers all are correct 2024 graded A+.pdf
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8/29/24, 5:27 PMMfin finance exam 2 tulane
Jeremiah
Terms in this set (145)
what does the apv method do decomposes firm value into value of corresponding all-equity firm and value from debt
if there are no advantages of debt, what reduces to just tax shields
happens to debt financing
FCF Cash flows accruing to the providers of capital
APv method cash flows come from advantages of debt
apv method discount rate based on risk
info: Equity (S) : 348,770.5 (= 475,000 - 126,229.5)
inflows 500k
-costs are 72% of sales so 360k
Initial Investment: 475,000
= 140k operating expenses
Cash Inflows: 500,000 per year, forever
-taxes of 34% so 47,600
Cash Costs: 72%
= 92,400 this is FCF
Tax Rate: 34%
Unlevered Cost of Equity: 20%
then do PV so 92,400/20%= 462,000
Debt (B): 126,229.5
Then NPV = 462,000-475,000(initial)= -13,000
what is PV
Then tax shield so 126,229.5*.34= 42,918
APV= NPV plus tax shield so -13k+42,918= 29,918
What method to use if debt to equity ratio is all are equal
constant out of wacc, FTE, and APV
which method to use if debt to equity ratio APV
changes out of wacc , fte, and apv
what method to use if dollar value of debt apv
and equity are provided out of wacc, fte,
and apv
Mfin finance exam 2 tulane
1/12
, 8/29/24, 5:27 PM
Equity (S) : 348,770.5 (= 475,000 - 126,229.5)
Inflows: 500k
FTE method
-costs: 500K x.72=360k
=operating income of 140k
Initial Investment: 475,000
- Cost of Debt, Debt x debt rate, so 126,229.5*.1=12,622.95
Cash Inflows: 500,000 per year - forever
= Taxable Income= 140k-12,622.95= 127,377.05
Cash Costs: 72%
-Taxes so 43,308.18
Tax Rate: 34%
= Levered Cash Flows: 84,068.85
Unlevered Cost of Equity: 20%
Cost of Equity: 22.2%
Then Cost of Equity = 22.2%, so
Cost of Debt 10.0%
84,068.85/0.222= 378,688.51
Debt (B): 126,229.5
NPV= PV - Initial Equity investment
So 378,688.51-348,770.5= 29,918
Avco is introducing a new line of packaging, First do Free Cash flows
the RFX Series. Year 0= Sales-Cogs= GP= 0
The cash flow projections are GP- Operating exp- Depreciation=EBIT so 0-6.67-0= -6.67= EBIT
- Sales of $60 million/year, for four years. EBIT -(Ebit x income tax) = 6.67- (6.67*.4)= -6.67+2.67= unlevered net income of -4m
Costs and operating Then Unlevered income + depr-CAPEX- increases in NWC= FCF
expenses of $25 million and $9 million, FCF= -4m+0-24m-0=-28m year 0 fcf
respectively, per year.
- $24 million investment in equipment plus Years 1-4 FCF
R&D and marketing Sales-Cogs= GP= 60-25=35
expenses of $6.67 million. GP- Operating exp- Depreciation=EBIT so 35-9-6=20= EBIT
- Depreciation over 4 years using straight- EBIT -(Ebit x income tax) = 20- (20*.4)= 20-8= unlevered net income of 12M
line method Then Unlevered income + depr-CAPEX- increases in NWC= FCF
- No salvage or terminal value FCF= 12+6-0-0=18M year 2-4 fcf s
- R&D and marketing expenses are
expensed, not depreciated Wacc= (B/(B+S)(1-t))Rb+(S/(B+S)*Rs)
- No net working capital requirements or WACC= Cost of DebtDebt ratio(1-tax)+ Equity ratio levered equity costs=
- Corporate tax rate of 40%. =0.56%(1-.4)+0.5*10%
- The project has a target debt ratio of 50%, = 6.8%
i.e., 50% debt, 50%
equity. Debt costs 6% and levered equity NPV= CF0=-28, CF1=18, CF2=18, CF3=18, CF4=18, I/Y=6.8%, NPV= ? 33.25 mil
costs 10%.
PlasticGlass Inc.,a fiberglass producer, is an We need Rs so we can use it to get Wacc, so B/S= .3/.7=3/7
all-equity firm that generates perpetual Rs= Ro+(Ro-Rb)x (B/S)*(1-Tc)
earnings before interest and taxes of $100 Rs= 18+(18-9)(3/7)(1-21%)=21.047
million per year. PlasticGlass' discount rate 30% debt, so 70% equity
when it is all equity financed is 18%. The
company's tax rate is 21%. If the firm decides WACC= 9(1-0.21)(0.3)+21.047*0.7= 16.87
to use debt, its cost of debt would be 9%.
What is the company's WACC if it decides to
use debt financing to cover 30% of its firm
value (i.e., B/(B+S) = 0.30)?
2/12
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