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In: Finance
Gemini, Inc., an all-equity firm, is considering an investment of $1.64 million that will be depreciated...
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Gemini, Inc., an all-equity firm, is considering an investment of $1.64 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $604,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 8.5 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $54,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm’s cost of capital would be 14 percent. The corporate tax rate is 35 percent. |
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Using the adjusted present value method, calculate the APV of the project. |
Solutions
jeff jeffy answered 2 years agoRelated Solutions
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investment that will be depreciated according to the straight-line
method over its four-year life. The project is expected to generate
earnings before taxes and depreciation of $595,000 per year for
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earnings before taxes and depreciation of $612,000 per year for
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finance the project from a local bank. All principal will be repaid
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