1．Currently, a firm has no outstanding debt. If the firm would add a small amount of leverage to its balance sheet, what should be the impact on the firm's value?

A)   No change in firm value.

B)   An increase in value due to interest tax shields.

C)   A decrease in value due to higher bankruptcy risk.

D)   A decrease in value due to higher interest expense.

2． analyst has prepared the following scenarios for Schneider, Inc.:

Scenario 1 Assumptions

§ Tax rate is 40%

§ Weighted average cost of capital (WACC) = 12%

§ Constant growth rate in free cash flow = 3%

§ Last year, free cash flow to the firm (FCFF) = $30

§ Target debt ratio = 10%

Scenario 2 Assumptions

§ Tax rate is 40%

§ Expenses before interest and taxes (EBIT), capital expenditures, and depreciation will grow at 15% for the next three years.

§ After three years, the growth in EBIT will be 2%, and capital expenditure and depreciation will offset each other.

§ Weighted average cost of capital (WACC) during high growth stage = 20%

§ Weighted average cost of capital (WACC) during stable growth stage = 12%

§ Target debt ratio = 10%

Assuming that Schneider, Inc., slightly increases its financial leverage, what should happen to its firm value? Firm value should:

A)   decline due to the increase in risk.

B)   increase due to the higher weighted average cost of capital.

C)   increase due to the additional value of interest tax shields.

D)   not change because financial leverage has no relationship with firm value.

3．ich of the following statements is FALSE? A firm’s free cash flows to equity (FCFE) is the cash available to stockholders after funding:

A)   capital expenditure requirements.

B)   working capital needs.

C)   debt principal repayments.

D)   dividend payments.

4．vidends paid out to the shareholders:

A)   are always equal to free cash flow to equity (FCFE).

B)   may be higher than free cash flow to equity FCFE.

C)   are always less than free cash flow to equity (FCFE).

D)   are always higher than free cash flow to equity (FCFE).

5．hich of the following statements regarding dividends and free cash flow to equity (FCFE) is INCORRECT?

A)   FCFE can be negative but dividends cannot.

B)   FCFE discount models and dividend discount models both require assumptions about growth and risk.

C)   Required returns are higher in FCFE discount models than they are in dividend discount models, since FCFE is more difficult to estimate.

D)   FCFE discount models usually result in higher equity values than do dividend discount models.

答案和详解如下：

1．Currently, a firm has no outstanding debt. If the firm would add a small amount of leverage to its balance sheet, what should be the impact on the firm's value?

A)   No change in firm value.

B)   An increase in value due to interest tax shields.

C)   A decrease in value due to higher bankruptcy risk.

D)   A decrease in value due to higher interest expense.

The correct answer was B)

The amount of financial leverage used by a firm will affect its value. For small amounts of leverage, the additional bankruptcy risk will be low, and will be more than offset by the additional value of interest tax shields.

2． analyst has prepared the following scenarios for Schneider, Inc.:

Scenario 1 Assumptions

§ Tax rate is 40%

§ Weighted average cost of capital (WACC) = 12%

§ Constant growth rate in free cash flow = 3%

§ Last year, free cash flow to the firm (FCFF) = $30

§ Target debt ratio = 10%

Scenario 2 Assumptions

§ Tax rate is 40%

§ Expenses before interest and taxes (EBIT), capital expenditures, and depreciation will grow at 15% for the next three years.

§ After three years, the growth in EBIT will be 2%, and capital expenditure and depreciation will offset each other.

§ Weighted average cost of capital (WACC) during high growth stage = 20%

§ Weighted average cost of capital (WACC) during stable growth stage = 12%

§ Target debt ratio = 10%

Scenario 2 FCFF	Year 0 (last year)	Year 1	Year 2	Year 3	Year 4
EBIT	$15.00	$17.25	$19.84	$22.81	$23.27
Capital Expenditures	6.00	6.90	7.94	9.13
Depreciation	4.00	4.60	5.29	6.08
Change in Working Capital	2.00	2.10	2.20	2.40	2.40
FCFF		5.95	7.06	8.25	11.56

Assuming that Schneider, Inc., slightly increases its financial leverage, what should happen to its firm value? Firm value should:

A)   decline due to the increase in risk.

B)   increase due to the higher weighted average cost of capital.

C)   increase due to the additional value of interest tax shields.

D)   not change because financial leverage has no relationship with firm value.

The correct answer was C)

For small changes in leverage, the additional value added by the interest tax shields will more than offset the additional risk of bankruptcy / financial distress. Given the tax advantage of debt, the firm's WACC should decline, not increase with small changes in leverage.

3．ich of the following statements is FALSE? A firm’s free cash flows to equity (FCFE) is the cash available to stockholders after funding:

A)   capital expenditure requirements.

B)   working capital needs.

C)   debt principal repayments.

D)   dividend payments.

The correct answer was D)

A firm’s FCFE is the cash available to stockholders after funding capital expenditures, working capital needs, and debt principal repayments.

4．vidends paid out to the shareholders:

A)   are always equal to free cash flow to equity (FCFE).

B)   may be higher than free cash flow to equity FCFE.

C)   are always less than free cash flow to equity (FCFE).

D)   are always higher than free cash flow to equity (FCFE).

The correct answer was B)    

Dividends represent the cash that the firm chooses to pay to the shareholders and the amount of the dividend is subject to the discretion of the firm. Dividends can be equal to, lower or higher than FCFE. For example, sometimes firms may pay dividends in years when there is a net loss.

5．hich of the following statements regarding dividends and free cash flow to equity (FCFE) is INCORRECT?

A)   FCFE can be negative but dividends cannot.

B)   FCFE discount models and dividend discount models both require assumptions about growth and risk.

C)   Required returns are higher in FCFE discount models than they are in dividend discount models, since FCFE is more difficult to estimate.

D)   FCFE discount models usually result in higher equity values than do dividend discount models.

The correct answer was C)

Although FCFE may be more difficult to estimate than dividends, the required return is based on the risk faced by the shareholders, which would be the same under both models.