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FIN:4330 INVESTMENT BANKING UIOWA
QUIZ 3 2026 ACTUAL QUESTIONS WITH
VERIFIED ANSWERS.
You are assessing the cost of debt, to use in the cost of capital,
for a firm. The firm has $1B in bank loans outstanding, carrying
an interest rate of 4%, and a remaining maturity of 8 years; the
loans were taken out a couple years ago when interest rates
were lower. The current risk-free rate is 5% and you anticipate
that your default spread to borrow long term is 2%. What is the
pre-tax cost of debt for this firm? - correct answer-4%
The firm has a market value of equity of $1B and you are
computing the debt to capital ratio (D/D+E) for the firm. What is
the debt to capital ratio? - correct answer->50%
Cost of Capital - Three Things: - correct answer-1. The
expected return for equity investors includes a premium for
equity risk = cost of equity
Expected Return/Cost of Equity = Riskless Rate + Beta (Risk
Premium)
2. The expected return that lenders require includes a default
risk = cost of debt
3. The cost of financing is then the weighted average of the
costs of equity and debt = cost of capital
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To obtain the bottom-up beta for a firm, we average regression
Betas across comparable firms. Which leads to the best
estimate of bottoms-up beta: - correct answer-a. A small
sample of similar companies
b. A large sample of companies that may have differences from
yours
c. One company exactly like your own
ANSWER: A large sample of companies that may have
differences from yours
A comparable firm has to be: - correct answer-a. A firm in the
same industry group
b. A firm listed in the same market
c. A firm with a similar market cap
d. None of the above
e. All of the above
NOTE: A comparable firm does not have to be in the same
business, but it does have to be impacted by the same forces
that you are affected by
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Three Approaches to Valuation: - correct answer-1. DCF
Valuation Estimate intrinsic value: Intrinsic value is the value
that would be attached to the firm by an unbiased analyst, who
not only estimates the expected cash flows for the firm correctly
but also attaches the right discount rate to value these cash
flows.
2. Relative Valuation (Pricing): estimates the value of an asset
by looking at the pricing of comparable assets relative to a
common value such as earnings, cash flows, book value,
EBITDA or sales.
3. Contingent Claim Valuation: Measures the value of assets
that share option characteristics via option pricing models
The Two Basic Approaches to Valuation: - correct answer-1.
Firm Value: Uses unlevered FCF (cash flows to firm) and
WACC
2. Equity Value: Uses levered FCF (cash flows to equity) and
equity cost of capital
NOTE: First question you need to address initially before
conducting a DCF is "do you want to value whole company, or
just the equity?
Firm Value Valuation: - correct answer-Firm Value values entire
business and is obtained by discounting expected unlevered
cash flows to the firm (EBIT - Taxes + D&A - CapEx +/-
Changes in WC) discounted to PV using WACC
FIN:4330 INVESTMENT BANKING UIOWA
QUIZ 3 2026 ACTUAL QUESTIONS WITH
VERIFIED ANSWERS.
You are assessing the cost of debt, to use in the cost of capital,
for a firm. The firm has $1B in bank loans outstanding, carrying
an interest rate of 4%, and a remaining maturity of 8 years; the
loans were taken out a couple years ago when interest rates
were lower. The current risk-free rate is 5% and you anticipate
that your default spread to borrow long term is 2%. What is the
pre-tax cost of debt for this firm? - correct answer-4%
The firm has a market value of equity of $1B and you are
computing the debt to capital ratio (D/D+E) for the firm. What is
the debt to capital ratio? - correct answer->50%
Cost of Capital - Three Things: - correct answer-1. The
expected return for equity investors includes a premium for
equity risk = cost of equity
Expected Return/Cost of Equity = Riskless Rate + Beta (Risk
Premium)
2. The expected return that lenders require includes a default
risk = cost of debt
3. The cost of financing is then the weighted average of the
costs of equity and debt = cost of capital
, Page | 2
To obtain the bottom-up beta for a firm, we average regression
Betas across comparable firms. Which leads to the best
estimate of bottoms-up beta: - correct answer-a. A small
sample of similar companies
b. A large sample of companies that may have differences from
yours
c. One company exactly like your own
ANSWER: A large sample of companies that may have
differences from yours
A comparable firm has to be: - correct answer-a. A firm in the
same industry group
b. A firm listed in the same market
c. A firm with a similar market cap
d. None of the above
e. All of the above
NOTE: A comparable firm does not have to be in the same
business, but it does have to be impacted by the same forces
that you are affected by
, Page | 3
Three Approaches to Valuation: - correct answer-1. DCF
Valuation Estimate intrinsic value: Intrinsic value is the value
that would be attached to the firm by an unbiased analyst, who
not only estimates the expected cash flows for the firm correctly
but also attaches the right discount rate to value these cash
flows.
2. Relative Valuation (Pricing): estimates the value of an asset
by looking at the pricing of comparable assets relative to a
common value such as earnings, cash flows, book value,
EBITDA or sales.
3. Contingent Claim Valuation: Measures the value of assets
that share option characteristics via option pricing models
The Two Basic Approaches to Valuation: - correct answer-1.
Firm Value: Uses unlevered FCF (cash flows to firm) and
WACC
2. Equity Value: Uses levered FCF (cash flows to equity) and
equity cost of capital
NOTE: First question you need to address initially before
conducting a DCF is "do you want to value whole company, or
just the equity?
Firm Value Valuation: - correct answer-Firm Value values entire
business and is obtained by discounting expected unlevered
cash flows to the firm (EBIT - Taxes + D&A - CapEx +/-
Changes in WC) discounted to PV using WACC
