Question
In: Finance
Roger has a levered cost of equity of 0.15. He is thinking of investing in a...
Roger has a levered cost of equity of 0.15. He is thinking of investing in a project with upfront costs of $9 million, which pays $3 million per year for the next 7 years. He is going to borrow $1 million to offset the startup costs at a rate of 0.05. His tax rate is 0.4. He will repay this loan at the end of the project. What is the NPV of this project, using the FTE method?
Solutions
Expert Solution
|
Given, Cost of the equity(CE) =
0.15 Cost of the Debt(CD) = 0.05 Tax Rate = 40% Total cost for the project is $ 9 Million. Of these, $ 1 Million is funded with borrowed funds and $ 8 Million is funded with Own funds. Annual cash inflow is $ 3 Million. Annual interest Payment is $ 1 Million * 0.05 = $50000. Interest payment of $50000 is eligible for tax deduction Weighted average cost of capital = CD*(1-Tax rate)*Debt funds/Total funds + CE * Own funds/ total funds = 0.05*(1-0.4)*$1M/$9M + 0.15*$8M/$9M = 0.0033 + 0.1333 = 0.1366 (or) 13.66% |
| Calculation of Net Present Value of the Project | ||||||||
| Year | Particulars | A | B | (C=A-B) | D | E=C-D | F | E*F |
| Cash Inflow/(Outflow) | Interest Paid | Net Cash Inflow(A-B) | Tax Paid @ 40% | Net cash flow after tax | Present Value annuity Factory @ 13.66 | PV of cash flow | ||
| 0 | Intial Cash outflow | -$ 90,00,000 | - | -$ 90,00,000 | - | -$ 90,00,000 | 1.0000 | -$ 90,00,000 |
| 1 | Cash inflow | $ 30,00,000 | $ 50,000 | $ 29,50,000 | $ 11,80,000 | $ 17,70,000 | 0.8798 | $ 15,57,276 |
| 2 | Cash inflow | $ 30,00,000 | $ 50,000 | $ 29,50,000 | $ 11,80,000 | $ 17,70,000 | 0.7741 | $ 13,70,118 |
| 3 | Cash inflow | $ 30,00,000 | $ 50,000 | $ 29,50,000 | $ 11,80,000 | $ 17,70,000 | 0.6810 | $ 12,05,453 |
| 4 | Cash inflow | $ 30,00,000 | $ 50,000 | $ 29,50,000 | $ 11,80,000 | $ 17,70,000 | 0.5992 | $ 10,60,578 |
| 5 | Cash inflow | $ 30,00,000 | $ 50,000 | $ 29,50,000 | $ 11,80,000 | $ 17,70,000 | 0.5272 | $ 9,33,115 |
| 6 | Cash inflow | $ 30,00,000 | $ 50,000 | $ 29,50,000 | $ 11,80,000 | $ 17,70,000 | 0.4638 | $ 8,20,970 |
| 7 | Cash inflow | $ 30,00,000 | $ 50,000 | $ 29,50,000 | $ 11,80,000 | $ 17,70,000 | 0.4081 | $ 7,22,303 |
| 7 | Loan repayment | -$ 10,00,000 | - | -$ 10,00,000 | - | -$ 10,00,000 | 0.4081 | -$ 4,08,081 |
| Net Present Value | -$ 17,38,268 |
jeff jeffy answered 1 year agoRelated Solutions
Roger has a levered cost of equity of 0.12. He is thinking of investing in a...
Roger has a levered cost of equity of 0.12. He is thinking of
investing in a project with upfront costs of $8 million, which pays
$2 million per year for the next 8 years. He is going to borrow $4
million to offset the startup costs at a rate of 0.05. His tax rate
is 0.3. He will repay this loan at the end of the project. What is
the NPV of this project, using the FTE method?
You Answered...
Roger has a levered cost of equity of 0.17. He is thinking of investing in a...
Roger has a levered cost of equity of 0.17. He is thinking of
investing in a project with upfront costs of $8 million, which pays
$2 million per year for the next 8 years. He is going to borrow $4
million to offset the startup costs at a rate of 0.05. His tax rate
is 0.4. He will repay this loan at the end of the project. What is
the NPV of this project, using the FTE method?
can someone show the work to this question Roger has a levered cost of equity of...
can someone show the work to this question
Roger has a levered cost of equity of 0.18. He is thinking of
investing in a project with upfront costs of $8 million, which pays
$1 million per year for the next 8 years. He is going to borrow $2
million to offset the startup costs at a rate of 0.08. His tax rate
is 0.3. He will repay this loan at the end of the project. What is
the NPV of...
Frankenstein Bicycles has an unlevered cost of equity of 0.15. Their bonds are worth 435,721 and...
Frankenstein Bicycles has an unlevered cost of equity of 0.15.
Their bonds are worth 435,721 and their equity is worth 323,527.
The debt rate is 0.02 and their tax rate is 0.22. What is
Frankenstein's cost of levered equity?
Professor Nickel is thinking of investing in two stocks: A and B. He has obtained data...
Professor Nickel is thinking of investing in two stocks: A and
B. He has obtained data regarding the closing prices of these
stocks on n = five days. Professor Nickel has calculated for this
data that Sxx = 236.8, Sxy = -282.4, and error variance =
18.81.
Day Number --- Stock A price/share (x) --- Stock B price/share
(y)
1 --- 91 --- 52
2 --- 85 --- 59
3 --- 75 --- 68
4 --- 72 --- 75
5...
You are opening a landscaping business, and wish to estimate your levered cost of equity. Beatrice's...
You are opening a landscaping business, and wish to estimate
your levered cost of equity. Beatrice's Yard Maintenance has an
equity beta of 1.3, and a D/E ration of 0.8. If the riskless rate
is 0.04, the expected return on the S&P500 is 0.14, and your
firm will have a D/E ratio of 1, what would your firm's levered
cost of equity be if the tax rate is 0.31? Please give your answer
in the form of a decimal to...
You are opening a landscaping business, and wish to estimate your levered cost of equity. Beatrice's...
You are opening a landscaping business, and wish to estimate
your levered cost of equity. Beatrice's Yard Maintenance has an
equity beta of 1.5, and a D/E ration of 0.7. If the riskless rate
is 0.04, the expected return on the S&P500 is 0.16, and your
firm will have a D/E ratio of 1, what would your firm's levered
cost of equity be if the tax rate is 0.28? Please give your answer
in the form of a decimal to...
You are opening a landscaping business, and wish to estimate your levered cost of equity. Beatrice's...
You are opening a landscaping business, and wish to estimate
your levered cost of equity. Beatrice's Yard Maintenance has an
equity beta of 1.2, and a D/E ration of 1.1. If the riskless rate
is 0.05, the expected return on the S&P500 is 0.11, and your
firm will have a D/E ratio of 1, what would your firm's levered
cost of equity be if the tax rate is 0.23? Please give your answer
in the form of a decimal to...
You are opening a landscaping business, and wish to estimate your levered cost of equity. Beatrice's...
You are opening a landscaping business, and wish to estimate
your levered cost of equity. Beatrice's Yard Maintenance has an
equity beta of 1.6, and a D/E ration of 1.0. If the riskless rate
is 0.03, the expected return on the S&P500 is 0.14, and your
firm will have a D/E ratio of 1, what would your firm's levered
cost of equity be if the tax rate is 0.29? Please give your answer
in the form of a decimal to...
Roger Inc. is currently an all equity firm that has 500,000 shares of stock outstanding at...
Roger Inc. is currently an all equity firm that has 500,000
shares of stock outstanding at a market price of $20 a share. EBIT
is $1,500,000 and is constant forever. The required annual rate of
return on the share is 12%. The corporate tax is 35%. The firm is
proposing borrowing an additional $2 million in debt and uses the
proceeds to repurchase stock. If it does so, the cost of debt will
be 10%. What will be the WACC...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Please do answer all four questions 11. A local college hospitality restaurant has the best meals...
- Acme, LLC produces three models of paint sprayers. A limitation of only 2,000 machine hours available...
- If you can run “traceroute/tracert” between machines in your organization. List three concrete applications to use...
- Discuss the differences among the terms cultural awareness, cultural sensitivity, cultural relevancy, cultural competence, and cultural...
- 1- Suppose you were tasked with developing the customer service qualities required for an external customer...
- History of Present Illness MDJ is a 50-year-old woman whose routine mammogram showed a 2.3 -...
- For a spherical thermal reactor with a water moderator in a homogeneous mixture, what is the...
ADVERTISEMENT