In: Finance

Your firm is considering a project with no start-up costs that will generate $1 million in FCF forever, starting in one year. Your debt-to-equity ratio is 1, your equity-holders require a return of 12%, and your debt-holders require a return of 8%. The tax rate is 20%. Using the Adjusted Present Value method, compute the unlevered value of the project, the value of the tax shield (assuming you maintain your current leverage ratio), and the levered value of the project.

a. V_u = $10 million, PV(Tax Shield) = $0.870 million, V_L = $10.870 million

b. V_u = $12 million, PV(Tax Shield) = $0.080 million, V_L = $12.080million

c. V_u = $10 million, PV(Tax Shield) = $1.740 million, V_L = $11.740 million

d. V_u = $11.740 million, PV(Tax Shield) = $0, V_L = $11.740 million

**Hence, the correct answer is the first option i.e.
option a. V_u = $10 million, PV(Tax Shield) = $0.870 million, V_L =
$10.870 million**

D/E = 1

Wd = D/(D + E) = 1 / (1 + 1) = 0.5

We = 1 - Wd = 0.5

Cost of equity for the unlevered firm, r = Wd x Kd + We x Ke = 0.5 x 8% + 0.5 x 12% = 10%

Hence, value of the unlevered firm = C/r = 1/10% = $ 10 million.

Let V be the value fo the levered firm. Then D = V x Wd = V x 50% = 0.5V

Interest = Kd x D = 8% x 0.5V = 0.04V

Interest tax shield = ITS = Interest x T = 0.04V x 20% = 0.008V

PV of ITS = ITS / r = 0.008V/10% = 0.08V

Also Value of the levered firm = Value of unlevered firm + PV of ITS

Hence, V = 10 + 0.08V

Hence, V = 10 / (1 - 0.08) = 10.870

and PV of ITS = 0.08V = 0.08 x 10.870 = 0.870

**Hence, the correct answer is the first option i.e.
option a. V_u = $10 million, PV(Tax Shield) = $0.870 million, V_L =
$10.870 million**

Your firm is considering a project that will cost
$ 4.548$4.548
million up front, generate cash flows of
$ 3.50$3.50
million per year for
33
years, and then have a cleanup and shutdown cost of
$ 6.00$6.00
million in the fourth year.
a. How many IRRs does this project have?
b. Calculate a modified IRR for this project
assuming a discount and compounding rate of
10.0 %10.0%.
c. Using the MIRR and a cost of capital of
10.0 %10.0%,
would...

4) Your company is considering a project that will generate
sales revenue of $90 million in Year 1. Revenue is expected to be
flat for subsequent years. The project requires working capital
equal to 16% of sales revenue, and has total operating costs
excluding depreciation equal to 50% of sales. The equipment has a 3
year MACRS life and can be purchased and installed for $100
million. The project will end in three years. At that time, the
equipment can...

Your firm is considering a project with a discount rate of 10%.
If you start the project today, your firm will incur an initial
cost of $480 and will receive cash inflows of $300 per year for 3
years with the first cashflow occurring one year from today. If you
instead wait one year to start the project, the initial cost will
rise to $520 and the cash flows will increase to $350 a year for
the following 3 years...

A firm has an investment project that will cost the firm $30
million but will generate $2 million of NPV. Also there is a 5%
chance that the firm will lose a lawsuit to employees, and be
forced to pay damage of $30 million. Suppose that a liability
insurance policy with a $30 million limit has a premium equal to
$1.5 million.
a. Compute expected claim cost
b. Compute the amount of loading on the policy
c. Compute the expected...

A firm has an investment project that will cost the firm $30
million but will generate $2 million of NPV. Also there is a 5%
chance that the firm will lose a lawsuit to employees, and be
forced to pay damage of $30 million. Suppose that a liability
insurance policy with a $30 million limit has a premium equal to
$1.5 million.
Compute expected claim cost
Compute the amount of loading on the policy
Compute the expected cost of not...

Your firm is considering a project that will cost $3 million in
initial investments. The project will earn cash flows of $750,000
for 6 years then terminate with no salvage value. If the WACC is
8%, what is the Net Present Value of the investment?
$467,160
$487,993
$472,627
$503,679
A project calls for $5.5 million in initial investments. The
project will return the following cash flows. What is the modified
IRR if the WACC of 7% is applied as the...

Bourque Enterprises is considering a new project. The project
will generate sales of $1.7 million, $2.4 million, $2.3 million,
and $1.8 million over the next four years, respectively. The fixed
assets required for the project will cost $2.7 million and will be
eligible for 100 percent bonus depreciation. At the end of the
project, the fixed assets can be sold for $185,000. Variable costs
will be 25 percent of sales and fixed costs will be $475,000 per
year. The project...

Bourque Enterprises is considering a new project. The project
will generate sales of $1.3 million, $1.8 million, $1.7 million,
and $1.2 million over the next four years, respectively. The fixed
assets required for the project will cost $1.7 million and will be
eligible for 100 percent bonus depreciation. At the end of the
project, the fixed assets can be sold for $185,000. Variable costs
will be 20 percent of sales and fixed costs will be $440,000 per
year. The project...

Bourque Enterprises is considering a new project. The project
will generate sales of $1.6 million, $2 million, $1.9 million, and
$1.4 million over the next four years, respectively. The fixed
assets required for the project will cost $1.5 million and will be
eligible for 100 percent bonus depreciation. At the end of the
project, the fixed assets can be sold for $175,000. Variable costs
will be 30 percent of sales and fixed costs will be $400,000 per
year. The project...

Bourque Enterprises is considering a new project. The project
will generate sales of $1.6 million, $2.3 million, $2.2 million,
and $1.7 million over the next four years, respectively. The fixed
assets required for the project will cost $2.1 million and will be
eligible for 100 percent bonus depreciation. At the end of the
project, the fixed assets can be sold for $195,000. Variable costs
will be 30 percent of sales and fixed costs will be $450,000 per
year. The project...

ADVERTISEMENT

ADVERTISEMENT

Latest Questions

- Step 1: Respond to the following: Planning and Executing Chapter 2 discusses the various project management...
- Write a C++ program that will use good object-oriented principles. You have been tasked to write...
- Python: What are the defintions of the three method below for a class Date? class Date(object):...
- What position does Michael Porter take when describing Shared Value? How does this differ from the...
- What is the treatment for schzophrenia condition? How was this disorder treated in the past? Has...
- Which of these are a case for Cultural Relativism? 1. Different societal contexts demand different moral...
- Annuity You are going to borrow money from the bank. But when considering your income, you...

ADVERTISEMENT