Question
Ferdinand is opening a motorcycle dealership. According to his research, Gwen's Power Sports, a nearby motorcycle dealer, has a levered cost of equity of 15.3%,
Ferdinand is opening a motorcycle dealership. According to his research, Gwen's Power Sports, a nearby motorcycle dealer, has a levered cost of equity of 15.3%, with a debt to equity ratio of 0.6. Both Gwen and Ferdinand can borrow at 6.5%, and the tax rate is 40%. Ferdinand's dealership will have a debt to equity ration of 1.0 and will cost $7,363,769 to set up. Each year there is a 70% chance of the dealership generating unlevered cash flows of $694,738, and a 30% chance of generating unlevered cash flows of $340,197. What is the NPV of Ferdinand's dealership, using the WACC method, if his dealership will remain open for the foreseeable future? Please give your answer to the nearest dollar.
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