QUESTION: 45

In relation to the use of the adjusted present value (APV) technique, which of the following statements are correct?

To apply APV, the proportions of debt and equity in the capital structure must be known.
To apply APV the actual amounts of debt and equity in the capital structure must be known.
The interest tax shield on the project's debt must be known, or at least estimated.
The weighted average cost of capital - net present value technique and the APV technique will, if applied correctly, give the same answer.

Answer(s): C,D

RFG is considering a major expansion that will result in a more diversified business model. At present, RFG's market capitalisation is $240 million. This is based on a beta of 1.6. The risk free rate is 4% and the market rate of return is 9%. RFG is financed entirely by equity. The company generates an annual cash surplus of $28.8 million.
The expansion will cost $50 million and will generate future cash flows of $12 million in perpetuity.
This new business will reduce RFG's beta to 1.4.
Calculate the adjusted present value of the expansion.

$81 million
$131 million
$321 million
$59 million

Answer(s): A

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QUESTION: 47

A has an opportunity to invest $90,000 in a project that is expected to generate annual cash inflows of $60,000 for each of the next three years. The project's beta coefficient implies a discount rate of 12% for this project, based on a risk-free rate of return of 3%. A is prepared to forego the expected cash flows from this project in return for a guaranteed payment of $50,000 at the end of year 1, $42,000 at the end of year 2 and $30,000 at the end of year 3.
What is the certainty equivalent value of this opportunity to A?

$9,493
$25,606
$54,120
$115,606

Answer(s): B

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QUESTION: 48

A project has an NPV of £1,200,000. The present value of material costs which are included in the NPV calculation are £8,000,000.
What is the sensitivity of the project to changes in material costs? Give your answer to the nearest whole percentage.

15%
15.5%

Answer(s): A

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