Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

QUESTION 4: AP Limited (APL) is considering purchasing a widget maker. The Widget maker will result in EBIT of $50,000 per year for 20 years.

image text in transcribed
QUESTION 4: AP Limited (APL) is considering purchasing a widget maker. The Widget maker will result in EBIT of $50,000 per year for 20 years. The widget maker will be depreciated over a 20 year period using straightline method, and will have no salvage value. The widget maker will not add/reduce the risk of the firm. APL has cost of unlevered equity of 12%, and pays corporate tax at 40%. Risk free rate of return is 3%. a. What is the maximum price APL should pay for the widget maker? b. Suppose due to economic reasons provincial government is willing to lend APL $120,000 at 2% for 20 years. Only interest will be paid each year. Principal will be paid at the end of the 20th year. Using APV approach, what is the maximum price APL would be willing to pay for the widget maker if APL's cost of debt is 8%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Psychology Applied To Teaching

Authors: Jack Snowman, Rick McCown

14th Edition

1285734556, 9781285734552

More Books

Students also viewed these Accounting questions

Question

Peoples understanding of what is being said

Answered: 1 week ago

Question

The quality of the proposed ideas

Answered: 1 week ago