Exam questions Capital Investment Policy
KU Leuven, D0T27A
A lot of old exam questions reappear on the exams, sometimes with different numbers. Study the
exams very thoroughly and you will pass the exam!
, Question 1
Given are the following data for year 1:
• Profits after taxes (net income): $20 million
• Depreciation: $6 million
• Interest expense: $4 million
• Capital expenditures: $12 million
• Investment in working capital: $4 million
• Corporate tax rate: 25 percent
The free cash flow (FCF) for year 1 is closest to:
• A. $11 million
• B. $7 million
• C. $8 million
• D. $13 million
• E. $22 million
Solution
Question 2
You are valuing a company using the APV method. The expected return on equity is 30%.
• The cost of debt is 7.5%.
• The debt-equity ratio is 0.5 and held constant.
• The tax rate is 35%.
The appropriate discount rate for the company's future interest tax shields in your valuation
is closest to:
• A. 30.0%
• B. 7.5%
• C. 22.5%
• D. 21.625%
• E. 14.625%
Question 3
Which of the following statements is FALSE?
• A. Miscalibrated managers tend to overestimate the precision of their forecasts.
KU Leuven, D0T27A
A lot of old exam questions reappear on the exams, sometimes with different numbers. Study the
exams very thoroughly and you will pass the exam!
, Question 1
Given are the following data for year 1:
• Profits after taxes (net income): $20 million
• Depreciation: $6 million
• Interest expense: $4 million
• Capital expenditures: $12 million
• Investment in working capital: $4 million
• Corporate tax rate: 25 percent
The free cash flow (FCF) for year 1 is closest to:
• A. $11 million
• B. $7 million
• C. $8 million
• D. $13 million
• E. $22 million
Solution
Question 2
You are valuing a company using the APV method. The expected return on equity is 30%.
• The cost of debt is 7.5%.
• The debt-equity ratio is 0.5 and held constant.
• The tax rate is 35%.
The appropriate discount rate for the company's future interest tax shields in your valuation
is closest to:
• A. 30.0%
• B. 7.5%
• C. 22.5%
• D. 21.625%
• E. 14.625%
Question 3
Which of the following statements is FALSE?
• A. Miscalibrated managers tend to overestimate the precision of their forecasts.
