FIN 301 FINAL EXAM QUESTIONS &
ANSWERS PASSED ALREADY
GRADED A+
Equation to find pretax rD when given income statement and balance sheet info -
Correct Answer ✔✔ pretax rD = interest / debt outstanding @BOP
What is pretax rD equal too? - Correct Answer ✔✔ IRR in 0 = ∑CFi/(1 + IRR)^Ti
Which form of rD can be found via weighted average? - Correct Answer ✔✔ pretax
What is the tax shield equal to? - Correct Answer ✔✔ 1 - tax rate
Equation for rD post tax given rD pretax - Correct Answer ✔✔ (1 - tax rate) x (rD pretax)
Equation to find how much net income will change with a given added debt scenario -
Correct Answer ✔✔ ∆NI = -(1 - tax rate) x (interest expense)
Equation to find rE using CAPM model - Correct Answer ✔✔ rE = rrf + beta x (rm - rrf)
Equation to find rE given simple information - Correct Answer ✔✔ FV = (1 + rE)^T x PV
What is CFi? - Correct Answer ✔✔ a projects' risk adjusted cash flows
What is rocc? - Correct Answer ✔✔ opportunity cost of capital or cost of capital
What are the two types of cost of capital? - Correct Answer ✔✔ rD (cost of debt capital)
and rE (cost of equity capital)
What does rD mean? - Correct Answer ✔✔ cost of debt capital: loan or bond contracts,
borrowing money
What does rE mean? - Correct Answer ✔✔ cost of equity capital: issuing shares of
stock, increasing ownership
Where does rE come from? - Correct Answer ✔✔ shareholders requiring their equity to
grow at an estimated rE% in return for participating in their project
what is rocc sometimes called? - Correct Answer ✔✔ rm (return of market) rocc = rm
Which measure of rD includes the effect on the income statement? - Correct Answer
✔✔ post tax
, Which measure of rD includes the tax shield effect? - Correct Answer ✔✔ post tax
What is the relationship between pre and post tax rD? Why? - Correct Answer ✔✔ rD
pre-tax >= rD post tax because of tax shield effect
How do you find pre tax rD given list of loan and bond contracts? - Correct Answer ✔✔
weighted average
What does pre tax rD fail to consider? - Correct Answer ✔✔ how debt may reduce tax
expense as seen on income statement
How may debt interest (within reason) benefit an entity? - Correct Answer ✔✔ it
reduces its tax which in turn mitigates the impact of interest payments on net income
What is the tax shield's effect on ROE? - Correct Answer ✔✔ tax shield increases return
on equity
stopped on page 20 - Correct Answer ✔✔
What are two ways to think of pre tax rD? - Correct Answer ✔✔ IRR of an entity's cash
flows viewed in isolation, cost of debt capital considered in isolation
What are two ways to think of post tax rD? - Correct Answer ✔✔ (1 - tax rate) x (pre tax
rD), net cost of debt capital on entity's net income (net bc post tax)
Why is it difficult to estimate rE? - Correct Answer ✔✔ because you are trying to find the
growth rate of an investment that has no contractual terms
What does CAPM stand for? - Correct Answer ✔✔ Capital Asset Pricing Model
How do we most often find rE? - Correct Answer ✔✔ CAPM model
What is the CAPM equation? - Correct Answer ✔✔ rE = rrf + (rm - rrf) x beta
What is the risk represented by rrf in the CAPM model? - Correct Answer ✔✔ risk free
risk, mainly inflation and interest rates
What is the risk represented by rm in the CAPM model? - Correct Answer ✔✔ broad
market risk (S&P 500 return risk)
What is the risk represented by beta in the CAPM model? - Correct Answer ✔✔ the
correlation and amplitude of project j to the market or industry
What is financial leverage? - Correct Answer ✔✔ using borrowed money to buy assets
ANSWERS PASSED ALREADY
GRADED A+
Equation to find pretax rD when given income statement and balance sheet info -
Correct Answer ✔✔ pretax rD = interest / debt outstanding @BOP
What is pretax rD equal too? - Correct Answer ✔✔ IRR in 0 = ∑CFi/(1 + IRR)^Ti
Which form of rD can be found via weighted average? - Correct Answer ✔✔ pretax
What is the tax shield equal to? - Correct Answer ✔✔ 1 - tax rate
Equation for rD post tax given rD pretax - Correct Answer ✔✔ (1 - tax rate) x (rD pretax)
Equation to find how much net income will change with a given added debt scenario -
Correct Answer ✔✔ ∆NI = -(1 - tax rate) x (interest expense)
Equation to find rE using CAPM model - Correct Answer ✔✔ rE = rrf + beta x (rm - rrf)
Equation to find rE given simple information - Correct Answer ✔✔ FV = (1 + rE)^T x PV
What is CFi? - Correct Answer ✔✔ a projects' risk adjusted cash flows
What is rocc? - Correct Answer ✔✔ opportunity cost of capital or cost of capital
What are the two types of cost of capital? - Correct Answer ✔✔ rD (cost of debt capital)
and rE (cost of equity capital)
What does rD mean? - Correct Answer ✔✔ cost of debt capital: loan or bond contracts,
borrowing money
What does rE mean? - Correct Answer ✔✔ cost of equity capital: issuing shares of
stock, increasing ownership
Where does rE come from? - Correct Answer ✔✔ shareholders requiring their equity to
grow at an estimated rE% in return for participating in their project
what is rocc sometimes called? - Correct Answer ✔✔ rm (return of market) rocc = rm
Which measure of rD includes the effect on the income statement? - Correct Answer
✔✔ post tax
, Which measure of rD includes the tax shield effect? - Correct Answer ✔✔ post tax
What is the relationship between pre and post tax rD? Why? - Correct Answer ✔✔ rD
pre-tax >= rD post tax because of tax shield effect
How do you find pre tax rD given list of loan and bond contracts? - Correct Answer ✔✔
weighted average
What does pre tax rD fail to consider? - Correct Answer ✔✔ how debt may reduce tax
expense as seen on income statement
How may debt interest (within reason) benefit an entity? - Correct Answer ✔✔ it
reduces its tax which in turn mitigates the impact of interest payments on net income
What is the tax shield's effect on ROE? - Correct Answer ✔✔ tax shield increases return
on equity
stopped on page 20 - Correct Answer ✔✔
What are two ways to think of pre tax rD? - Correct Answer ✔✔ IRR of an entity's cash
flows viewed in isolation, cost of debt capital considered in isolation
What are two ways to think of post tax rD? - Correct Answer ✔✔ (1 - tax rate) x (pre tax
rD), net cost of debt capital on entity's net income (net bc post tax)
Why is it difficult to estimate rE? - Correct Answer ✔✔ because you are trying to find the
growth rate of an investment that has no contractual terms
What does CAPM stand for? - Correct Answer ✔✔ Capital Asset Pricing Model
How do we most often find rE? - Correct Answer ✔✔ CAPM model
What is the CAPM equation? - Correct Answer ✔✔ rE = rrf + (rm - rrf) x beta
What is the risk represented by rrf in the CAPM model? - Correct Answer ✔✔ risk free
risk, mainly inflation and interest rates
What is the risk represented by rm in the CAPM model? - Correct Answer ✔✔ broad
market risk (S&P 500 return risk)
What is the risk represented by beta in the CAPM model? - Correct Answer ✔✔ the
correlation and amplitude of project j to the market or industry
What is financial leverage? - Correct Answer ✔✔ using borrowed money to buy assets
