Billboard, Inc. is considering a new project costing

$400

million. The

project cost can be depreciated on a straight-line over 20 years. Part

of the cost of the project will be nanced with a new bond issue.

In order to nance a portion of new project, Billboard has sold for

$93

:

54

million a twenty year, zero coupon bond with face value of

$300

million. The issuance of debt will carry a one time cost at year 0

of $

12

:

9

million. The issuance cost can not be depreciated or used to

oset taxes. The project generates EBIT with an expected value of

$40

million for each of the next twenty years, commencing one year after

the start of the project. CFO believes that the debt obligation will

be fullled with probability ONE, implying that the interest expense

deductions associated with the tax-shield on the new debt have a zero

covariance with the return on the market. The cash ows of the project

do vary with the market, with the implied unlevered asset beta equal

to

1

:

5

. The expected return on the market is

12%

and the risk-free

rate is

6%

. The CFO believes that the government is likely to push

for an increase in the corporate income tax rate from

16%

up to

28%

,

and ascribes a

75%

chance that government will succeed in getting to

pass the tax increase proposal. The CFO assumes that this event has

zero covariance with the market portfolios return and has no eect on

the projects unlevered asset beta. He asks you to evaluate the project

using APV. Billboard, Inc. must make its accept/reject decision on

BEFORE outcome of the government tax debate is known.

(a) (5 points) Find the expected corporate tax rate

(b) (5 points) What are the expected annual after-tax Unlevered

Cash Flows associated with the project?

(c) (5 points) What is the discounted value (PV) of the after-tax

Unlevered Cash Flow stream?

(d) (5 points) Compute an amortization table for the bond.

(e) (5 points) What is the value of the Debt Tax Shield associated

with this project?

(f) (5 point) What is the projects APV? Should Billboard, Inc. in-

vest into project?