Gemini Inc an all equity firm, is considering a $1.9 million investment that will be depreciated according
Question:
Gemini Inc an all equity firm, is considering a $1.9 million investment that will be depreciated according to the straight line method over its four year life.The project is expected to generateearnings before taxes and depreciation of $685,000 per year for four years.The investment will not change the risk level of the firm.The company can obtain a four year 9.5% loan to finance the project from a local bank.All principle will be repaid in one balloon paymentat the end of the fourth year.The bank will charge the firm $28,000 in flotation costs which will be amortized over the four year life of the loan.If the company financed the project entirely with equity the firm's cost of capital would be 13%The corporate tax rate is 30%.Use the Adjusted Present Value Method (APV) to determine if they should undertake project
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe