Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its

Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over six years using the straight-line method. The new cars are expected to generate $210,000 per year in earnings before taxes and depreciation for six years. The company is entirely financed by equity and has a 25 percent tax rate. The required return on the companys unlevered equity is 14 percent and the new fleet will not change the risk of the company. The risk-free rate is 7 percent.

a.

What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. Suppose the company can purchase the fleet of cars for $705,000. Additionally, assume the company can issue $530,000 of six-year debt to finance the project at the risk-free rate of 7 percent. All principal will be repaid in one balloon payment at the end of the sixth year. What is the APV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a. Maximum Price ??

B. APV ??

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

Real Estate Finance

Authors: Walt Huber, Levin P. Messick

5th Edition

0916772438, 9780916772437

More Books

Students also viewed these Finance questions

Question

5. How can we use language to enhance skill in perceiving?

Answered: 1 week ago

Question

What actions might have prevented Bobs resignation?

Answered: 1 week ago