Based on market values, Gubler's Gym has an equity multiplier of 1.67 times. Shareholders require a...

Based on market values, Gubler's Gym has an equity multiplier of 1.67 times. Shareholders require a return of 11.75 percent on the company's stock and a pretax return of 5.05 percent on the company's debt. The company is evaluating a new project that has the same risk as the company itself. The project will generate annual aftertax cash flows of $319,000 per year for 8 years. The tax rate is 39 percent. What is the most the company would be willing to spend today on the project?

Expert Solution

A/E = 1.67

E/A = 1/1.67=0.5988

D/A = 1-E/A = 1-0.5988=0.4012

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 5.05*(1-0.39)

= 3.0805

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=3.08*0.4012+11.75*0.5988

WACC =8.27%

Project
Discount rate	8.2718170%
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	0	319000	319000	319000	319000	319000	319000	319000	319000
Discounting factor	1.000	1.083	1.172	1.269	1.374	1.488	1.611	1.744	1.889
Discounted cash flows project	0.000	294628.841	272119.606	251330.044	232128.777	214394.459	198015.019	182886.946	168914.636
NPV = Sum of discounted cash flows
NPV Project =	1814418.33
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

jeff jeffy answered 1 year ago

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