Question
Apple inc is a tech retailer. Similar companies have an average debt-to-equity ratio of D/E= 0.66, an average equity beta of E = 1.111, and
Apple inc is a tech retailer. Similar companies have an average debt-to-equity ratio of D/E= 0.66, an average equity beta of E = 1.111, and an average beta of debt of D = 0.20 (Assume that these similar companies have maintained a constant debt-equity ratio.) Apple and its competitors are subject to a 60% marginal corporate tax rate. apple is planning a new project and is expected to generate the following free cash flows:
year 0: -40,000,000
year 1: 5,100,000
year2: 5,100,000
year 3: 5,100,000
year 4: 5,100,000
year 5: 5,100,000
apple's policy is to follow a target debt-to-equity ratio of D/E = 0.7 and its beta of debt is D= 0.1. all new projects are expected to be financed with a constant ratio of debt-to-equity of D/E = 0.5 as well. The risk-free rate is rf = 2.5% and the expected risk premium on the market is E[RM] rf = 6%.
1: Estimate the discount rate (cost of capital) that you would use in evaluating this project.
2: Estimate the net present value (NPV) of the project
3: calculate the net present value (NPV) of the project assuming 100% equity financing.
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