Question
Your firms market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M Equity $300M Asset
Your firms market value balance sheet is given as follows:
Market Value Balance Sheet | |||
Excess cash | $30M | Debt | $230M |
Operating Assets | $500M | Equity | $300M |
Asset Value | $530M | Debt + Equity | $530M |
Assume that the you plan to keep the firms debt-to-equity ratio fixed. The firms corporate tax rate is 50%. The firms cost of debt is 10% and cost of equity is 20%.
Now, suppose that you are considering a new project that will last for one year. According to your analysis, free cash flows from the project are -$1,000 today (i.e. year 0) and $1,322.40 one year from today (i.e. year 1). This new project can be viewed as a carbon copy of the entire firms existing business. You want to find the NPV of the project using three different DCF methods: WACC/APV/FTE.
QUESTION 1
What is the NPV of the project if the project were financed by 100% equity (i.e. unlevered)?
A. | $200 | |
B. | $160 | |
C. | $20 | |
D. | $140 |
QUESTION 2
The new project is financed with the same capital structure as the entire firm (implying that the interest tax shield should be discounted using the unlevered cost of capital). To do so, you raise $464 in debt at year 0. Then, what would the present value of the interest tax shield be? Assume that the interest rate on the debt is the same as the firms cost of debt (i.e. 10%).
A. | $140 | |
B. | $160 | |
C. | $20 | |
D. | $200 |
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