Q1. XYZ has a debt-equity ratio of 1.5. Its WACC is 12.5%, and its cost of equity capital is 20%. The corporate tax rate is 35%. What is XYZ's cost of debt? Q2. XYZ has a debt-to-value ratio of 0.6. Its WACC is 12.5%, and its cost of debt is 6%. The corporate tax rate is 35%. What is XYZ's unlevered cost of equity capital, i.e., Ru? = Q3. XYZ expects an EBIT of $10,000 every year forever. XYZ currently has no debt, and its cost of equity is 12%. The firm can borrow at 8%. Suppose the corporate tax rate is 35%. Assume that Depreciation Capital Expenditure and there is no change of NWC. When using APV method, what will be the value of XYZ if it converts to 20% debt, i.e., Debt = 20% of VL? (Hint: first calculate VU, then calculate VL) Q4. XYZ, Inc. has equity with a market value of $25 million and debt with a market value of $10 million. Risk free rate is 5%, and the expected return on the market portfolio is 15%. The beta of XYZ's equity is 1.2. Assume cost of debt of XYZ is the risk free rate plus 1% and tax rate is 0%. What is the cost of capital for an otherwise identical all-equity firm? Q5. Suppose MNO has an equity cost of capital of 9%, market capitalization of $12 million, and an enterprise value of $15 million (i.e., net debt = $3 million. Use net debt to compute the weight of debt and equity when compute WACC). Suppose MNO's after-tax cost of debt, i.e., Rd*(1-tax), is 8% and its tax rate is 35%. What is MNO'S WACC? = Q6. Suppose MNO has an equity cost of capital of 9%, market capitalization of $12 million, and an enterprise value of $15 million (i.e., net debt $3 million. Use net debt to compute the weight of debt and equity when compute WACC). Suppose MNO's after-tax cost of debt, i.e., Rd*(1-tax), is 8% and its tax rate is 35%. What is MNO's unlevered cost of capital? Q7. XYZ has historically maintained a debt-to-value ratio of approximately 0.15. Its current stock price is $30 per share, with 2 million shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.3 and can borrow at 5%, when the risk-free rate is 4.25%. The expected return of the market is 10%, and XYZ's tax rate is 35%. XYZ is expected to have unlevered free cash flows of $3 million. What constant expected growth rate of free cash flow is consistent with its current stock price? Q8. Suppose the debt-to-value ratio (D/V) of Avco is 33%. The cost of equity is 9% and the cost of debt is 6%. The tax rate is 40%. Given the following information, what's the value of the project at time 0 based on FCFF in year 1 to year 4, i.e., VL at time 0 (not the NPV)? TABLE 18.1 SPREADSHEET Expected Free Cash Flow from Avco's RFX Project Year 0 1 2 3 4 Incremental Earnings Forecast ($ million) Sales 2 Cost of Goods Sold 3 Gross Profit 4 Operating Expenses 5 Depreciation 6 EBIT 7 Income Tax at 40% 8 Unlevered Net Income Free Cash Flow ($ million) 60.00 65.00 70.00 75.00 -25.00 -27.00 -29.00 -31.00 -6.67 -9.00 -9.00 -9.00 -9.00 -6.00 -6.00 -6.00 -6.00 9 Plus: Depreciation 6.00 6.00 6.00 6.00 10 Less: Capital Expenditures -24.00 0.00 0.00 0.00 0.00 11 Less: Increases in NWC 0.00 0.00 0.00 0.00 0.00 12 Free Cash Flow Q9. Based on the information in Q8, what's the NPV of the project? Q10. Based on the information in Q8, what's the interest paid in year 2?