Question
2. The market-value balance sheet and other financial data for Company XXX are listed below. Asset value $1,200,000 Debt $300,000 Equity $900,000 $1,200,000 $1,200,000 Cost
2. The market-value balance sheet and other financial data for Company XXX are listed below.
Asset value $1,200,000 Debt $300,000
Equity $900,000
$1,200,000 $1,200,000
Cost of debt 5%
Cost of equity 12.5%
Marginal tax rate 21%
The financial manager of company XXX is considering a project that requires $50,000 investment today and expects to generate perpetual earnings and cash flow of $5,000 each year (pre-tax). Assume no depreciation. However, the project supports only 35% debt, which is different from the debt ratio of company XXX overall. Calculate NPV of the project by adjusting the WACC of the project. (keep four decimals including a percentage to avoid rounding error). [40 points]
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