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Question;Use the information for the question(s) below.;Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with;each outcome being equally likely. The initial investment required for the project is $80,000, and the project?s cost of;capital is 15%. The risk-free interest rate is 5%.;1) Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm.;The equity holders will receive the cash flows of the project in one year. The market value of the unlevered;equity for this project is closest to;A) $94,100;B) $90,000;C) $86,250;D) $98,600;2) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate, then;the value of the firm?s levered equity from the project is closest to;A) $0;B) $10,000;C) $6,000;D) $8,600;3) Suppose thatto raise the;funds forthe initial investment the firm borrows $80,000 at the risk free rate;then;the cost of capital for the firm?s levered equity is closest to;A) 45%;B) 25%;C) 15%;D) 95%;4) Two separate firms are considering investing in this project. Firm unlevered plans to fund the entire $80,000;investment using equity, while firm levered plans to borrow $45,000 at the risk-free rate and use equity to;finance the remainder of the initial investment. Calculate the expected returns for both the levered and;unlevered firm.;5) Which of the following is not one of Modigliani and Miller?s set of conditions referred to as perfect capital;markets?;A) All investors hold the efficient portfolio of assets.;B) There are no taxes, transaction costs, or issuance costs associated with security trading.;C) A firm?s financing decisions do not change the cash flows generated by its investments, nor do they;reveal new information about them.;D) Investors and firms can trade the same set of securities at competitive market prices equal to the;present value of their future cash flows.;6) Which of the following statements is false?;A) While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm?s equity.;B) Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation.;C) We can use Modigliani and Miller?s first proposition to derive an explicit relationship between leverage;and the equity cost of capital.;D) The total market value of the firm?s securities is equal to the market value of its assets, whether the firm;is unlevered or levered.;7) Which of the following statements is false?;A) The levered equity return equals the unlevered return, plus an extra?kick? due to leverage.;B) By holding a portfolio of the firm?s equity and its debt, we can replicate the cash flows from holding its;levered equity.;C) The cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium;that is proportional to the market value debt-equity ratio.;D) If a firm is unlevered, all of the free cash flows generated by its assets are available to be paid out to its;equity holders.;8) Which of the following statements is false?;A) With no debt, the WACC is equal to the unlevered equity cost of capital.;B) With perfect capital markets, a firm?s WACC is dependent of its capital structure and is equal to its;equity cost of capital only the firm it is unlevered.;C) As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is;that the firm?s WACC is unchanged.;D) Although debt has a lower cost of capital than equity, leverage does not lower a firm?s WACC.;Use the information for the question(s) below.;9) Suppose that you borrow only $45,000 in financing the project. According to MM proposition II, calculate;the firm?s equity cost of capital.;10) Sisyphean Bolder Movers Incorporated has no debt, a total equity capitalization of $50 billion, and a beta of;2.0. Included in Sisyphean?s assets are $12 billion in cash and risk-free securities. Calculate Sisyphean?s;enterprise value and unlevered cost of equity considering the fact that Sisyphean?s cash is risk-free.

 

Paper#44729 | Written in 18-Jul-2015

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