Questions from Corporate Finance

Q: Calculate the weighted-average cost of capital (WACC) for

Calculate the weighted-average cost of capital (WACC) for Federated Junkyards of America, using the following information: Debt: $75,000,000 book value outstanding. The debt is trading at 90% of book...

Q: True or false? Use of the WACC formula assumes a

True or false? Use of the WACC formula assumes a. A project supports a fixed amount of debt over the project’s economic life. b. The ratio of the debt supported by a project to project value is consta...

Q: What is meant by the flow-to-equity valuation method

What is meant by the flow-to-equity valuation method? What discount rate is used in this method? What assumptions are necessary for this method to give an accurate valuation?

Q: True or false? The APV method a. Starts with

True or false? The APV method a. Starts with a base-case value for the project. b. Calculates the base-case value by discounting project cash flows, forecasted assuming all equity financing, at the WA...

Q: A project costs $1 million and has a base-case

A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project’s APV in the following cases? a. If the firm invests, it has to raise $500,000 by a stock issue. Issue...

Q: Whispering Pines, Inc., is all-equity-financed.

Whispering Pines, Inc., is all-equity-financed. The expected rate of return on the company’s shares is 12%. a. What is the opportunity cost of capital for an average-risk Whispering Pines investment?...

Q: Consider a project lasting one year only. The initial outlay is

Consider a project lasting one year only. The initial outlay is $1,000 and the expected inflow is $1,200. The opportunity cost of capital is r = .20. The borrowing rate is rD = .10, and the tax shield...

Q: The WACC formula seems to imply that debt is “cheaper”

The WACC formula seems to imply that debt is “cheaper” than equity—that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly.

Q: Suppose Federated Junkyards decides to move to a more conservative debt policy

Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later its debt ratio is down to 15% (D/V = .15). The interest rate has dropped to 8.6%. Recalculate Federated’s W...

Q: Suppose KCS Corp. buys out Patagonia Trucking, a privately owned

Suppose KCS Corp. buys out Patagonia Trucking, a privately owned business, for $50 million. KCS has only $5 million cash in hand, so it arranges a $45 million bank loan. A normal debt-to-value ratio f...