Your firm is considering a $150 million investment to launch a new product line The project is expected to generate a free cash flow of $20 million per year, and its unlevered cost of capital is 10 To fund the investment, your firm will take on $100 million in permanent debt a Suppose the marginal ...

a With permanent debt the APV method is simplest NPV unlevered 150 20 ...

Your firm is considering a $150 million investment to launch a new product line. The project is

Question:

Your firm is considering a $150 million investment to launch a new product line. The project is expected to generate a of $20 million per year, and its unlevered is 10%. To fund the investment, your firm will take on $100 million in permanent debt.
a. Suppose the marginal corporate tax rate is 35%. Ignoring issuance costs, what is the NPV of the investment?
b. Suppose your firm will pay a 2% underwriting fee when issuing the debt. It will raise the remaining $50 million by issuing equity. In addition to the 5% underwriting fee for the equity issue, you believe that your firm’s current share price of $40 is $5 per share less than its true value. What is the NPV of the investment including any tax benefits of leverage? (Assume all fees are on an after-tax basis.)

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...