D practice questionpdf - Google Chrome 5 https://wattlecourses.anu.edu.au/p|uginfile.php/18411SO/modiresource/content/l/practice%20question,pdf practice questionlpdf E: 0 Type here to search 2/3 _. __ ' .........,... . ... .. .._. What is the difference between a foreign bond and a Eurobond? You are evaluating a project that requires an investment of $90 today and provides a single cash ow of $115 for sure one year from now. You decide to use 100% debt nancing, that is, you will borrow $90. The riskfree rate is 5% and the tax rate is 40%. Assume that the investment is Jlly depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash ow and the investment, that is, $25. a. Calculate the NPV of this investment opportunity using the APV method. b. Using vour a i Eli .. u + 6:07 PM 30/10/201 8 D practice questionpdf - Google Chrome 5 https://wattlecourses.anu.edu.au/p|uginfile.php/18411SO/modiresource/content/1/practice%20question.pdf Q practice questionipdf $115 for sure one year from now. You decide to use 100% debt nancing, that is, you will borrow $90. The risk-free rate is 5% and the tax rate is 40%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash ow and the investment, that is, $25. a. Calculate the NPV of this investment opportunity using the APV method. b. Using your answer to part a, calculate the WACC of the project. 0. Verify that you get the same answer using the WACC method to calculate NPV. d. Finally, show that ow-toequity also correctly gives the NPV of this investment opportunity. ' 6:07 PM 0 Type here to search "' 30/10/2018 D solutionpdf - Google Chrome X E https://wattlecourses.anu.edu.au/pluginle.php/18411S1/mod,resource/content/1/so|ution.pdf Q solutionipdf Using your answer to part a, calculate the WACC of the project. Verify that you get the same answer using the WACC method to calculate NPV. Finally, show that ow-to-equity also correctly gives the NPV of this investment opportunity. FCF at year end (aer tax) = 115 0.40 x 25 = 105 Vu =105/1.05 = 100 PV(its) = 40% x 5% x 90/1.05 = 1.71 VL= 100 +1.71 = 101.71 NPV = 101.71 90 =11.71 r" = rd = 5%, d = 90/101.71 rs = 40%, WACC = 5% (90/101 .71)(40%)(5%) = 3.23% NOTE: if r" = rd, must use techniques in section 18.8 to calculate WACC. VL =105/1.0323 =101.71 NPV = 101.71 90 = 11.71 FCFEo = 0 FCFE. = 105 5%(90)(1 40%) 90 = 12.3 R_e = 5% (since no risk) Value to equity = l2.3/1.05 = 11.71 6TH PM El 30/10/2018