Written-out practice exercises Capital Investment Policy

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.