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 billion 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 1 2 3 4 5 6 Free cash flow - 13.0 -2.0 1.2 1.4 1.8 1.9 2.01 Debt Balance at year end (in $ million) 10.0 9.8 9.5 9.0 8.5 8.3 8.0 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 billion 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 1 2 3 4 5 6 Free cash flow - 13.0 -2.0 1.2 1.4 1.8 1.9 2.01 Debt Balance at year end (in $ million) 10.0 9.8 9.5 9.0 8.5 8.3 8.0
