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