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Questions and Answers
- Financial leverage refers to
- Financial leverage refers to
- The firm’s ability to secure competitive prices for raw materials to use in manufacturing products
- The excess cash flow available to a firm for future expansion activities
- The use of debt in a firm’s capital structure (correct)
- The raw value of firm’s core operations that can be used for future capital investment
Which statement is not correct about the Adjusted Present Value (APV) model?
Which statement is not correct about the Adjusted Present Value (APV) model?
- To understand the relationship between value and leverage is necessary
- Estimates the value of a firm’s core operations in two parts, with and without leverage
- Discounts the free cash flow stream at the weighted-average cost of capital
- Captures the value created by leverage better than the discounted free cash flow model (correct)
Assume that an all-equity financed company with cost of equity of 10% generates unlevered FCFs of
13 million in perpetuity. It plans to take on perpetual debt of $100m with interest rate of 5%. Tax rate is
20%. What is the value of this company after the change in capital structure?
Assume that an all-equity financed company with cost of equity of 10% generates unlevered FCFs of 13 million in perpetuity. It plans to take on perpetual debt of $100m with interest rate of 5%. Tax rate is 20%. What is the value of this company after the change in capital structure?
- $130m
- $150m (correct)
- $13m
- $135m
Why is it not recommended to always use Discounted Cash Flow (DCF) over Adjusted Present Value (APV)?
Why is it not recommended to always use Discounted Cash Flow (DCF) over Adjusted Present Value (APV)?
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Which factor is crucial for an analyst to understand in relation to the Adjusted Present Value model (APV)?
Which factor is crucial for an analyst to understand in relation to the Adjusted Present Value model (APV)?
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In a scenario where a company has a high cost of equity and low debt capacity, which valuation model would be more suitable to use?
In a scenario where a company has a high cost of equity and low debt capacity, which valuation model would be more suitable to use?
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