QFC Corporate Finance & Investment 2

Question 1

A firm has EBIT of $500M, taxes of 30%, depreciation of $80M, capex of $120M, and an increase in net working capital of $40M. What is the Free Cash Flow to Firm (FCFF)?

Accepted Answer

$270M

Answer

FCFF = EBIT(1-T) + D&A - CapEx - ΔNWC = 500(0.7) + 80 - 120 - 40 = $270M.

Question 2

Which capital structure theory argues that in a world with corporate taxes, firm value increases monotonically with debt because of the tax shield?

Accepted Answer

Modigliani-Miller with taxes

Answer

The MM proposition with corporate taxes shows firm value = unlevered value + PV(tax shield), implying 100% debt is optimal in that frictionless world.

Question 3

A project costs $1M today, generates $300K/year for 5 years, and has a WACC of 10%. Which statement is MOST accurate?

Accepted Answer

NPV is negative; reject the project

Answer

PV of annuity = 300,000 × (1-(1.1)^-5)/0.10 ≈ $1,137K, but subtracting $1M cost gives NPV ≈ $137K — actually positive, so the first distractor is closer; however 300K×3.7908=$1,137K−$1M=$137K>0, accept.

Question 4

In a leveraged buyout (LBO), which metric is most critical for assessing the deal's ability to service acquisition debt?

Accepted Answer

Debt/EBITDA coverage and free cash flow generation

Answer

LBO debt service capacity depends on stable and sufficient free cash flow, typically measured relative to EBITDA.

Question 5

The Adjusted Present Value (APV) method values a levered firm as:

Accepted Answer

Unlevered firm value plus PV of financing side effects

Answer

APV = Base-case NPV (unlevered) + NPV of financing effects such as the interest tax shield.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Corporate Finance & Investment 2