TataCoo Inc is facing a new investment opportunity. The project will require $ 15 million initial investment and is expected to generate volatile cash flow during the first six years.
The estimated after-tax cash flow during year 1 through 6 is given below. From year 7, the after-tax cash flow is expected to grow at a constant growth rate of 2% per year.
The company's current balance sheet shows a $2 billion debt in book value and the debt is trading at 90% of book value. The debt beta is 0.6.
The market value of equity of the company is $3 billiion and the equity beta is 2.5.
The company has kept a stable capital structure in the past. To take this new investment project, the company will issue $10 million new debt at the current borrowing cost.
The underwriter charges 1.5% of debt issue as their commission.
The company plans to gradually reduce its borrowing in the first 6 years and then return to its previous stable capital structure.
Debt repayment scchedule is given below. Assume the corporate tax rate is 21%.
Suppose the risk free rate is 5% and market risk return is 9%.
A.	What is the unlevered beta of the company (unlevered beta=asset beta)?
B.	Calcualte the required return on assets (unlevered cost of capital), levered cost of capital (return on equity with leverage) and after-tax WACC.
C.	Calculate the APV of this project.
		Cashflow Forecast in $M
		0	1	2	3	4	5	6
	Free cash flow	-13.0	-2.0	1.2	1.4	1.8	1.9	2.0
	Debt Balance at year end (in $ million)	10.0	9.8	9.5	9.0	8.5	8.3	8.0
	a few lines are cut? does it not let you scroll over? it only goes to 6 years