The company CocoGoods is evaluating a new investment opportunity. The asset beta for the company is 2.5.
With some initial investment in the fixed assets, the project's cash flow is projected to be varying during the first four years and thereafter the cash flow will stay stable. The details of the cash flows are given below:
Right now, CocoGoods' capital structure is stable with a D/V of 0.4. But in order to take this project, CocoGoods plan to temporarily increase its debt amount. The borrowing cost for CocoGoods is 7% and will not change for increased debt.
The borrowing amount will be $8M and the company plans to pay back some of the debt in the first four years and from year 4 the debt ratio will be stable again, at 40% of the asset value.
The debt repayment scchedule is given below.
The risk-free rate is 3% per year and the market risk prmium is 4%. Assume the corporate tax rate is 21%.
A.	What is the opportunity cost of capital of the company?
B.	What is current cost of equity with a D/V=0.4?
C.	What is the after tax-WACC?
D.	What is the horiziontal value of at year 4?
E.	What is the base case NPV of this project?
F.	Calculate the interest tax sheild in year 1-4.
G.	Calculate the APV of this project.
H.	Suppose underwrite charges 2% of the debt issue amount as their commission. What is the APV after considering the financing cost?
			Cashflow Forecast in $M
			0	1	2	3	4
	1.	Sales		5.0	5.5	6.0	6.5
	2.	Cost of goods sold		2.0	2.2	2.4	2.6
	3.	EBITDA (1 - 2)		3.0	3.3	3.6	3.9
	4.	Depreciation		2.75	2.75	2.75	2.75
	5.	Profit before tax (EBIT) (3 - 4)		0.3	0.6	0.9	1.2
	6.	Tax		0.1	0.1	0.2	0.2
	7.	Profit after tax (5 - 6)		0.2	0.4	0.7	0.9
	8.	Investment in fixed assets	11.0
	9.	Investment in working capital	1.0	1.5	1.2	1.4	1.6
	10.	Free cash flow (7 + 4 - 8 - 9)	-12.0	1.4	2.0	2.0	2.1
			0	1	2	3	4
		Debt Balance at year end	8	7.74	7.21	6.85	6.63