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1. Your firms market value balance sheet is given as follows:

   Market Value Balance Sheet
   Excess cash	$30M	Debt	$230M
   Operating Assets	$500M	Equity	$300M
   Asset Value	$530M	Debt + Equity	$530M

   Assume that the you plan to keep the firms debt-to-equity ratio fixed. The firms corporate tax rate is 50%. The firms cost of debt is 10% and cost of equity is 20%.

   Now, suppose that you are considering a new project that will last for one year. According to your analysis, free cash flows from the project are -$1,000 today (i.e. year 0) and $1,322.40 one year from today (i.e. year 1). This new project can be viewed as a carbon copy of the entire firms existing business. You want to find the NPV of the project using three different DCF methods: WACC/APV/FTE.

   What is the firms WACC?

   	A.	20%
   	B.	10%
   	C.	14%
   	D.	16%

1. Under the WACC approach, the NPV of the project is obtained by discounting future ______ using the WACC.

   	A.	Tax savings
   	B.	Free cash flow to equity
   	C.	Free cash flow to debt
   	D.	Free cash flow

1. What is the NPV based on the WACC approach?

   	A.	$20
   	B.	$160
   	C.	$140
   	D.	$200

1. What is the firms unlevered cost of capital?

   	A.	20%
   	B.	10%
   	C.	16%
   	D.	14%

1. What is the NPV of the project if the project were financed by 100% equity (i.e. unlevered)?

   	A.	$140
   	B.	$200
   	C.	$160
   	D.	$20

1. The new project is financed with the same capital structure as the entire firm (implying that the interest tax shield should be discounted using the unlevered cost of capital). To do so, you raise $464 in debt at year 0. Then, what would the present value of the interest tax shield be? Assume that the interest rate on the debt is the same as the firms cost of debt (i.e. 10%).

   	A.	$200
   	B.	$140
   	C.	$20
   	D.	$160

1. What is the NPV of the project based on the APV approach?

   	A.	$160
   	B.	$20
   	C.	$140
   	D.	$200

1. What is the FCFE at year 0? (Hint: You raise $464 in debt at time 0.)

   	A.	-$536
   	B.	$835.20
   	C.	-$835.20
   	D.	$536

1. What is the FCFE at year 1? (Hint: You repay the debt of $464 at time 1.)

   	A.	-$536
   	B.	$536
   	C.	$835.20
   	D.	-$835.20

1. Which of the following serves as the discount rate for free cash flows to equity?

   	A.	16%
   	B.	14%
   	C.	20%
   	D.	10%

1. What is the NPV of the project based on the FTE approach?

   	A.	$200
   	B.	$160
   	C.	$140
   	D.	$20

1. Do the WACC/APV/FTE approaches produce identical NPV values?

   Yes

   No

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