Question Details

Akyol Corporation





1. Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). 									
									
						
Year: 1 2 									
Free cash flow: -$50 $100 									
									
a. $1,456 									
b. $1,529 									
c. $1,606 									
d. $1,686 									
e. $1,770												
									
									
2. Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations? 															
									
a. $1,714,750 									
b. $1,805,000 									
c. $1,900,000 									
d. $2,000,000 									
e. $2,100,000									
						
									
									
3. Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5? 									
																						
									
a. $719 									
b. $757 									
c. $797 									
d. $839 									
e. $883									
					
									
									
									
4. Based on the corporate valuation model, Bernile Inc.'s value of operations 									
is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions? 									
				
a. $429 									
b. $451 									
c. $475 									
d. $500 									
e. $525 									
																
									
5. Which of the following statements is CORRECT? 									
a.When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase. 									
b.The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share. 									
c. All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio. 									
d. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC. 									
e. Since debt is cheaper than equity, increasing a company's debt ratio will always reduce its WACC.									





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