Michael Jordie, CEO of Roma Corp. is planning to announce a capital budgeting project before stock market opens. The current market value of the firm is $1,000 million. The project consists in launching a factory to expand Roma's operations. Details are as follows: Initial cost of $530 million (which includes physical plant cost of $500 million and $30 million of initial net working capital). The after tax unlevered cash flows are $40 million at the end of years one to 20 . Salvage value of the plant is negligible. The plant will be depreciated using straight-line method. Net working capital will be fully recovered at the end of year 20. The project is financed with $300 million debt and the rest with equity. The unlevered cost of capital is 10%. Cost of debt is 6% and the tax rate is 25%. The 20-year Treasury bond rate is 4% (assume is riskless). Based on this information calculate the following: a) Present value of the after-tax unlevered cash flows. [4 points] b) Present value of depreciation tax shield. [4 points] c) Present value of the interest tax shield. [4 points] d) Present value of recovery of net working capital. [4 points] e) Adjusted present value of the project. Should Mr. Jordie announce the project before the market opens? Why? Explain. [4 points] f) If Mr. Jordie announces the project, answer the following questions: f1) By how much the value of Rome will change after announcing the project? [2 points] f2) what would Roma's value be after announcing the project? [2 points] f3) What would the percent change in firm value be after announcing project? What would the percent change in stock price be? [4 points] Michael Jordie, CEO of Roma Corp. is planning to announce a capital budgeting project before stock market opens. The current market value of the firm is $1,000 million. The project consists in launching a factory to expand Roma's operations. Details are as follows: Initial cost of $530 million (which includes physical plant cost of $500 million and $30 million of initial net working capital). The after tax unlevered cash flows are $40 million at the end of years one to 20 . Salvage value of the plant is negligible. The plant will be depreciated using straight-line method. Net working capital will be fully recovered at the end of year 20. The project is financed with $300 million debt and the rest with equity. The unlevered cost of capital is 10%. Cost of debt is 6% and the tax rate is 25%. The 20-year Treasury bond rate is 4% (assume is riskless). Based on this information calculate the following: a) Present value of the after-tax unlevered cash flows. [4 points] b) Present value of depreciation tax shield. [4 points] c) Present value of the interest tax shield. [4 points] d) Present value of recovery of net working capital. [4 points] e) Adjusted present value of the project. Should Mr. Jordie announce the project before the market opens? Why? Explain. [4 points] f) If Mr. Jordie announces the project, answer the following questions: f1) By how much the value of Rome will change after announcing the project? [2 points] f2) what would Roma's value be after announcing the project? [2 points] f3) What would the percent change in firm value be after announcing project? What would the percent change in stock price be? [4 points]
