Question
Happy AS is formed to realize a 3-year project. The project is expected to give the following free cash flows over the next 3 years
Happy AS is formed to realize a 3-year project. The project is expected to give the following free cash flows over the next 3 years (figures are in millions of kroner): Time 1 2 3 Cash flow 200 250 180 An investment of NOK 500 million is required. The company will only be financed with equity and will have 4 million shares. The project's investment beta is estimated at 0.8, the market's risk premium is 5%, while the risk-free interest rate is 3%. Assume that Modigliani & Miller's propositions I and II without taxes apply. Assume Modigliani & Miller's propositions I and II with corporation tax apply and corporation value at 100% equity is as you have calculated under b). How would the size of the loan have been affected if it had been corporation tax? Explain. (You do not need to make any calculations.)
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