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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Waterdeep Adventure Travel has an unlevered cost of equity of
18.8%, and a cost of debt of 6.1%. Their tax rate is 36%, and they
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
$53,584, and would bring in $22,809 one year from today, and
$88,237 two years from today. What is the NPV of this project,
using the...

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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Please read the article and answear about
questions.
Determining the Value of the Business
After you have completed a thorough and exacting investigation,
you need to analyze all the infor- mation you have gathered. This
is the time to consult with your business, financial, and legal
advis- ers to arrive at an estimate of the value of the business.
Outside advisers are impartial and are more likely to see the bad
things about the business than are you. You should...

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