a 10. (15 pts) MarsMax. Inc is facing a new investment opportunity that has similar business risk as its current operation. The project will require $ 12 million initial investment and is expected to generate volatile cash flow during the first three years. The estimated after-tax cash flow during year 1 through 3 is given below. From year 4, the after-tax cash flow is expected to grow at a constant growth rate of 2% per year. The company's current balance sheet shows a $2 billion debt in book value and the debt is trading at 80% of book value. The debt beta is 0.6. The market value of equity of the company is $4.8 billion and the equity beta is 1.75. The company has kept a stable capital structure in the past. To take this new investment project, the company will issue $10 million new debt at the current borrowing cost. The underwriter charges 1.5% of debt issue as their commission. The company plans to gradually reduce its borrowing in the first 3 years and then return to its previous stable capital structure. Debt repayment schedule is given below. Assume the corporate tax rate is 21%. Suppose the risk-free rate is 2% and market risk return is 10%. Cashflow Forecast in $M 0 1 IN 3 After-tax Free cash flow -12.0 2.0 3.0 3.7 Debt Balance at year end (in $ million) 10.0 9.0 8.5 6.5 A. What is the unlevered beta of the company and the return on assets? B. Calculate the levered cost of capital (return on equity) and after-tax WACC for periods with stable capital structure. C. What is the base case APV? D. What is the present value of interest tax shield for the first three years? E. Calculate the APV of this project with financing cost incorporated. a 10. (15 pts) MarsMax. Inc is facing a new investment opportunity that has similar business risk as its current operation. The project will require $ 12 million initial investment and is expected to generate volatile cash flow during the first three years. The estimated after-tax cash flow during year 1 through 3 is given below. From year 4, the after-tax cash flow is expected to grow at a constant growth rate of 2% per year. The company's current balance sheet shows a $2 billion debt in book value and the debt is trading at 80% of book value. The debt beta is 0.6. The market value of equity of the company is $4.8 billion and the equity beta is 1.75. The company has kept a stable capital structure in the past. To take this new investment project, the company will issue $10 million new debt at the current borrowing cost. The underwriter charges 1.5% of debt issue as their commission. The company plans to gradually reduce its borrowing in the first 3 years and then return to its previous stable capital structure. Debt repayment schedule is given below. Assume the corporate tax rate is 21%. Suppose the risk-free rate is 2% and market risk return is 10%. Cashflow Forecast in $M 0 1 IN 3 After-tax Free cash flow -12.0 2.0 3.0 3.7 Debt Balance at year end (in $ million) 10.0 9.0 8.5 6.5 A. What is the unlevered beta of the company and the return on assets? B. Calculate the levered cost of capital (return on equity) and after-tax WACC for periods with stable capital structure. C. What is the base case APV? D. What is the present value of interest tax shield for the first three years? E. Calculate the APV of this project with financing cost incorporated
