BADM 710 COMPREHENSIVE EXAMS SET
2026 SOLVED QUESTIONS
●● The flow-to-equity (FTE) approach in capital budgeting is defined as
the: Answer: discounting of a project's levered cash flows to the
equityholders at the required return on equity.
●● Given the all-equity cost of capital, the cost of levered equity can be
computed as: Answer: RS = R0 + (B/S)(1 − tC)(R0 − RB).
●● Which of these methods discount levered cash flows? Answer: FTE
●● The cost of equity for an all-equity firm is designated as: Answer:
R0.
●● Simpson Enterprises is considering a new project with revenue of
$325,000 for the indefinite future. Cash costs are 63 percent of the
revenue. The initial cost of the investment is $425,000. The tax rate is 21
percent and the unlevered cost of equity is 17 percent. What is the net
present value of the project? Answer: $133,809
UCF = $325,000(1 − .63)(1 − .21)
UCF = $94,997.50
NPV = ($94,997.50/.17) − $425,000
2026 SOLVED QUESTIONS
●● The flow-to-equity (FTE) approach in capital budgeting is defined as
the: Answer: discounting of a project's levered cash flows to the
equityholders at the required return on equity.
●● Given the all-equity cost of capital, the cost of levered equity can be
computed as: Answer: RS = R0 + (B/S)(1 − tC)(R0 − RB).
●● Which of these methods discount levered cash flows? Answer: FTE
●● The cost of equity for an all-equity firm is designated as: Answer:
R0.
●● Simpson Enterprises is considering a new project with revenue of
$325,000 for the indefinite future. Cash costs are 63 percent of the
revenue. The initial cost of the investment is $425,000. The tax rate is 21
percent and the unlevered cost of equity is 17 percent. What is the net
present value of the project? Answer: $133,809
UCF = $325,000(1 − .63)(1 − .21)
UCF = $94,997.50
NPV = ($94,997.50/.17) − $425,000
