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QUESTION 2: PharmGen Limited has a target B/V ratio of 3/4 and is in the 30% tax bracket. The required rate of return on the
QUESTION 2: PharmGen Limited has a target B/V ratio of 3/4 and is in the 30% tax bracket. The required rate of return on the firm's levered equity is 14.04%. PharmGen is planning to expand its production capacity. The expansion is expected to generate the following unlevered cash flows (in millions of $s): Year 0 1 2 3 4 5 and after Cash Flow -$100 7. 10 13 14 declines at 6% per year forever PharmGen can obtain a $75 million loan at a subsidized rate of 3% to partially finance the expansion. Risk free rate of return is 2% and market risk premium is 6%. PharmGen debt has a beta of 0.7. Under the loan, the company would pay interest at the end of each year on the outstanding balance at the beginning of the year. The company would also make principal repayments of $15,000,000 per year, completely retiring the issue at the end of the 5th year. Using the APV approach, should PharmGen proceed with the expansion? QUESTION 2: PharmGen Limited has a target B/V ratio of 3/4 and is in the 30% tax bracket. The required rate of return on the firm's levered equity is 14.04%. PharmGen is planning to expand its production capacity. The expansion is expected to generate the following unlevered cash flows (in millions of $s): Year 0 1 2 3 4 5 and after Cash Flow -$100 7. 10 13 14 declines at 6% per year forever PharmGen can obtain a $75 million loan at a subsidized rate of 3% to partially finance the expansion. Risk free rate of return is 2% and market risk premium is 6%. PharmGen debt has a beta of 0.7. Under the loan, the company would pay interest at the end of each year on the outstanding balance at the beginning of the year. The company would also make principal repayments of $15,000,000 per year, completely retiring the issue at the end of the 5th year. Using the APV approach, should PharmGen proceed with the expansion
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