Question
Extremely disgruntled by the fact that his examination problems can be searched on google and are available for purchase on website, one professor decides to
Extremely disgruntled by the fact that his examination problems can be searched on google and are available for purchase on website, one professor decides to take matters in his own hands and start a website called the "auto". Auto provides college professors unique examination problems which are not searchable on the internet and can be used for online classes without worrying about cheating. He resigns from his job and registers auto as a company.
Leaving nothing to chance, the spirited professor liquidates his entire savings of $100,000 and brings that in as cash on the CV balance sheet. he also goes "all in" and sells his house and invests the proceeds of $200,000 as equity in the company. further more and much to the chagrin of his family, he goes ahead and borrows $500,000 from the state bank of NY at a very high rate of interest rate of 6.6% per annum (current interest rates are 0%!) on the way home (house is sold remember) he estimates the B debt for auto would likely have been 0.2 and concludes that it is only fair. Decision has already been taken. Time in now for action.
Now that he is all in, he needs to know the NPV of auto. For NPV calculations he must know the appropriate cost of capital to use in a capital budgeting exercise for auto. He also find out the following info about a similar company
a. D/E=.32
b. Bequity=0.45
c. Bdebt=0.1
Answer the following:
a. Calculate Auto's zero's Bunlevered
b. use auto's Bunlevered and autos D/E rain and autos Bdebt to calculate the autos Bequity
c. using autos Equity and Bd and a risk free rate of 5 % and a market risk premium of 8%, calculate Re and Rd for auto.
d. Calculate Runlevered (unlettered cost of capital) for auto
e. using a tax rate of 21% and Re and Rd and proper E/E+V and D/D+V for auto, calculate the WACC for auto, which is the appropriate cost of capital to use for discounting the free cash flows for auto.
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