In: Finance
Consider a project of the Pearson Company (as in an example from Lecture 3 slides). The timing and size of the incremental after-tax cash flows for an equity-financed project are:
Year |
0 |
1 |
2 |
3 |
4 |
CF |
-1,000 |
325 |
250 |
375 |
500 |
The firm is financing the project with $600 debt which carries 8% interest rate. The firm currently has no leverage, faces 40% tax rate and has 10% cost of capital. Value the project using flow to Equity Valuation
Hint: estimate the cost of equity using this formula:
Re=Ru+BE1-TRu-RB
In the above, Ru is the unlevered cost of capital, which is 10% in this case; RB is the cost of debt, and T is tax rate. B is the value of debt, and E is the market value of equity.
Consider a project of the Pearson Company (as in an example from Lecture 3 slides). The timing and size of the incremental after-tax cash flows for an equity-financed project are:
Year |
0 |
1 |
2 |
3 |
4 |
CF |
-1,000 |
325 |
250 |
375 |
500 |
The firm is financing the project with $600 debt which carries 8% interest rate. The firm currently has no leverage, faces 40% tax rate and has 10% cost of capital. Value the project using flow to Equity Valuation
Hint: estimate the cost of equity using this formula:
Re=Ru+BE1-TRu-RB
In the above, Ru is the unlevered cost of capital, which is 10% in this case; RB is the cost of debt, and T is tax rate. B is the value of debt, and E is the market value of equity.