Corporate Finance MCQ - Corporate Finance Section 2

6 In the context of net present value (NPV) profiles of two projects, the crossover rate is most appropriately described as the discount rate at which:

The crossover rate is the rate at which the NPVs of the projects are the same.

7 In the context of net present value (NPV) profiles, the point at which a profile crosses the vertical axis is most appropriately described as:

The vertical axis represents zero discount rate. The point at which the NPV profile crosses the vertical axis is simply the sum of undiscounted cash flows.

8 The following data is available for a company:
Cost of debt: 9%
Cost of equity: 12%
Debt-to-equity ratio (D/E): 100%
Tax rate: 30%
The weighted average cost of capital (WACC) is closest to:

Wd = (D/E) / (1 + D/E) = 1 / (1 + 1) = 50% We = 1 - Wd = 50% WACC = Wd Rd (1 - t) + We Re WACC = 50% * 9% * (1 - 30%) + 50% * 12% = 9.15%

9 The following information is available for a firm:
Debt-to-equity ratio: 50%
Tax rate: 30% Cost of debt: 12%
Cost of equity: 19%
The firm’s weighted average cost of capital (WACC) is closest to:

Wd = (D/E) / (1 + D/E) = 0.5 / (1 + 0.5) = 33.3%
We = 1 - Wd = 66.7%
WACC = Wd Rd (1 - t) + We Re
WACC = 33.3%* 12%* (1 - 30%) + 66.7% * 19% = 15.47%.

10 The following information is available for a firm:
Cost of debt: 11%
Cost of equity: 15%
Debt-to-equity ratio (D/E): 50%
Tax rate: 35%
The weighted average cost of capital (WACC) is closest to:

Wd = (D/E) / (1 + D/E) = 0.5 / (1 + 0.5) = 33.3%
We = 1 - Wd = 66.7%
WACC = Wd Rd (1 - t) + We Re
WACC = 33.3% * 11% * (1 - 35%) + 66.7% * 15% = 12.39%