Question
Donald Corporation has an asset beta of 1.65, a tax rate of 40%, and can typically borrow at 6%. The riskless rate is 1.5% and
Donald Corporation has an asset beta of 1.65, a tax rate of 40%, and can typically borrow at 6%. The riskless rate is 1.5% and the expected return on the S&P 500 is 12.9%. Donald is considering investing in a project with an initial cost of $400,000 and a yearly EBIT of $120,000 for the next 8 years. Donald will borrow $350,000 for 8 years to finance the project, at a subsidized interest rate of 5%.
a) What is Donald's unlevered cost of equity?
b) What is the NPV of this project if Donald pays cash?
c)What is the NPV of the loan to Donald?
d) What is the overall NPV of this project?
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