Question

Eyesore Electric Scooters is opening a new branch in Lincoln today. Their unlevered cost of equity is 14%, and their cost of debt is 5%. Their debt to equity ratio is 1.1, and their tax rate is 26%. Initial costs are $1.5M. The firm expects EBIT of $1M one year from today, $500,000 two years from today, and $200,000 three years from today, after which they expect to shut down. They will finance some of their startup costs by borrowing $400,000 at their cost of debt, to be repaid three years from today.

**Part A (10 points).** What is Eyesore’s levered
cost of equity?

**Part B (15 points).** What is the NPV of this
project using the FTE method?

Answer #1

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Complying with the auditing requirements of this loan would have a
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Wilma is considering opening a widget factory. The unlevered
cost of equity for making widgets is 0.13. This factory would cost
$27 million to set up, and would produce EBIT of $3 million per
year for the foreseeable future. She is thinking of applying for a
$3 million subsidized perpetual loan to finance this project.
Complying with the auditing requirements of this loan would have a
present value of $2 million. This loan would have a rate of 0.04,
while...

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Waterdeep Adventure Travel has an unlevered cost of equity of
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maintain a capital structure of 52% debt and the rest equity. They
are considering giving cave exploration tours to their menu of
adventure vacations. Buying the needed equipment would cost
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You are working for The Good, The
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