Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Statements A Step By Step Guide To Understanding And Creating Financial Reports

Authors: Thomas Ittelson

1st Edition

1632652072, 978-1632652072

More Books

Students also viewed these Finance questions

Question

Discuss the various types of policies ?

Answered: 1 week ago

Question

Briefly explain the various types of leadership ?

Answered: 1 week ago

Question

Explain the need for and importance of co-ordination?

Answered: 1 week ago

Question

Explain the contribution of Peter F. Drucker to Management .

Answered: 1 week ago

Question

7. Understand the challenges of multilingualism.

Answered: 1 week ago

Question

5. Give examples of variations in contextual rules.

Answered: 1 week ago