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ABC Corporation, which specializes in the furniture business, is considering an expansion. ABC maintains a constant debt-to-value ratio (i.e., D/V) of 40%. The firm's
ABC Corporation, which specializes in the furniture business, is considering an expansion. ABC maintains a constant debt-to-value ratio (i.e., D/V) of 40%. The firm's expected return on equity (Re) is 12.5% and the firm's cost of debt is 5%. The corporate tax rate is 25%. The expansion costs $1 million today and generates unlevered after-tax cash flows of $300,000 per year in perpetuity, starting next year. The risk of the expansion project is the same as that of the firm's existing business. Also, ABC intends to continue with the same debt-to-value ratio after the expansion. Should ABC undertake the expansion? Value this firm using the APV and WACC methods.
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