Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your firm is considering building a $599 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of $137 million per year for the

Your firm is considering building a $599 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of $137 million per year for the next ten years. The plant will be depreciated on a straight-line basis over ten years (assuming no salvage value for tax purposes). After ten years, the plant will have a salvage value of $294 million (which, since it will be fully depreciated, is then taxable). The project requires $50 million in working capital at the start, which will be recovered in year ten when the project shuts down. The corporate tax rate is 35%. All cash flows occur at the end of the year.

a. If the risk-free rate is 4.3%, the expected return of the market is 10.1%, and the asset beta for the consumer electronics industry is 1.73, what is the NPV of the project?

b. Suppose that you can finance $479 million of the cost of the plant using ten-year, 9.3% coupon bonds sold at par. This amount is incremental new debt associated specifically with this project and will not alter other aspects of the firm's capital structure. What is the value of the project, including the tax shield of the debt?

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

Financial Markets And Institutions

Authors: Jeff Madura

10th Edition

1285531507, 9781285531502

More Books

Students also viewed these Finance questions