Question
A corporation is currenty at its target capital structure. The corporation considers a scale enhancing project that extends its current bustness lines. You are given
A corporation is currenty at its target capital structure. The corporation considers a scale enhancing project that extends its current bustness lines. You are given the following information (assigned points in parent)
Expected cash flow of the project. Initial costs $70 million; EBIT (cash-flow before interest & tax) $12 million per year in perpetuity from next year
Equity: 1 million shares outstanding, selling for $50 per share, the beta in 1.0
Debt 100,000 zero-bond outstanding $1,000 par value, selling for 0.25, 18 years to maturity
Market: 0.07 market risk premium; 0.062 risk-free rate
Tax: 0.39 corporate tax rate
What is the net present value of the project (accounting for initial costs) based on the WACC approach (in million $)?
What is the unievered cost of capital?
What is the net present value of the project (accounting for initial costs!) if financed by equity only (in milion $)?
What is the value of the tax shield (in million 5) [hint APV method or MM theorem 1 with taxes
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