Question

The Benton Corporation is evaluating a new project. It will be financed with $1.4 million of...

The Benton Corporation is evaluating a new project. It will be financed with $1.4 million of debt and $1.6 million of equity. The (unleveraged) after-tax cash flows (CFATs) expected to result from the investment are $1.35 million per year for the next three years, after which time the project is expected to be sold for a net after-tax amount of $0.85 million. The debt financing will be a three-year debt with interest payments of 6% per year on the remaining balance. Principal payments will be $500,000 in year 1 (end of first year), $400,000 in year 2 (end of second year), and $500,000 at the end of year 3. The net benefit-to-leverage factor, T*, is 0.20 for this investment. The (unleveraged) required return for the project is 14%.

Which of the following statements is (are) true? Group of answer choices The net APV is $940,919.21 The net APV is $839.673.49 The net APV is $738,427.76 The project should be accepted The project should be rejected The use of APV makes sense for evaluating this project because it is funded separately from the firm.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider a project to produce solar water heaters. It requires a $10 million investment and offers...
Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.69 million per year for 10 years. The opportunity cost of capital is 11.25%, which reflects the project’s business risk. a. Suppose the project is financed with $7 million of debt and $3 million of equity. The interest rate is 7.25% and the marginal tax rate is 21%. An equal amount of the debt will be repaid in...
Suppose a firm financed with a $150 million perpetual debt, and with 10 million shares each...
Suppose a firm financed with a $150 million perpetual debt, and with 10 million shares each worth $15. The expected return on the debt is 8% and the expected return on equity is 16%. The tax rate is 40%. The company is also considering a second project. The project requires an initial investment of $75 million, and will generate an annual pretax cash flow of $19.5 million in perpetuity. The risk of the project is the same as that of...
A new business requires $100,000 investment. The project can either be entirely equity financed, or 50%...
A new business requires $100,000 investment. The project can either be entirely equity financed, or 50% of the investment can be funded by a bank loan at 12%. Assume no tax. EBIT is expected to be $15,000, but it could be as low as $5,000. Calculate ROE for all 4 scenarios (unlevered low EBIT, unlevered high EBIT, levered low EBIT, unlevered high EBIT). At what level of EBIT the shareholders receive the same return on equity regardless the percentage of...
Suppose that your company is launching a new project. To estimate the cost of capital for...
Suppose that your company is launching a new project. To estimate the cost of capital for the project you search the market and find a company that has very similar risk characteristics to the project as follows: Market capitalization, MVE = $100.00 million Market value of debt, D = $50.00 million Cost of debt, Rd = 5.00% Cost of equity, Re = 15.50% Corporate tax rate, t = 30% Calculate the cost of capital of the project for the following...
Tolchester Marina invests in a project to improve its facilities. The upfront investment is $2.5 million....
Tolchester Marina invests in a project to improve its facilities. The upfront investment is $2.5 million. The improvements will lead to an increased operating cash flow of $225,000/year forever. The cost of capital is 10%. The base-case NPV of the project is? Tolchester is able to borrow $2 million to finance the project. Its borrowing rate is 6%. Tolchester pays state and local taxes at 30%. If the debt is perpetual, the NPV of financing is? The APV (adjusted present...
You are evaluating a capital budgeting replacement project with a net investment of $85,000, which includes...
You are evaluating a capital budgeting replacement project with a net investment of $85,000, which includes both an after-tax salvage from the old asset of $5,000 and an additional working capital investment of $10,000. The expected annual incremental cash flows after-tax is $14,000. The project has a life of 9 years with an expected terminal value at the end of the project of $13,000. The cost of capital of the firm is 10 percent and the firm’s marginal tax rate...
A new business requires $100,000 investment. The project can either be entirely equity financed, or 50%of...
A new business requires $100,000 investment. The project can either be entirely equity financed, or 50%of the investment can be funded by a bank loan at 12%. Assume no tax. EBIT is expected to be $15,000, but it could be as low as $5,000. a)Calculate ROE for all 4 scenarios (unlevered low EBIT, unlevered high EBIT, levered low EBIT, unlevered high EBIT). b)At what level of EBIT the shareholders receive the same return on equity regardless the percentage of debt...
A firm is considering investing in a 15-year capital budgeting project with a net investment of...
A firm is considering investing in a 15-year capital budgeting project with a net investment of $14 million. The project is expected to generate annual net cash flows each year of $2 million and a terminal value at the end of the project of $10 million. The firm’s cost of capital is 9 percent and marginal tax rate is 40%. What is the profitability index of this investment? 0.35 0.78 2.86 1.54 1.35
Gradient Ltd is evaluating a new project that has the same risk as the overall firm....
Gradient Ltd is evaluating a new project that has the same risk as the overall firm. The cost is estimated at $75,000 and the expected cash flows are: Year Cash Flow 1 $18,000 2 $25,400 3 $35,000 4 $17,900 Currently the company has 50% debt and 50% equity. The cost of Spark’s debt is 9% and T-bills are yielding 5%. The market risk premium is 10% and Spark Ltd has a beta of 1.2. Tax rate is 30%. Should the...
Blue Ribbon, Inc., is considering a new two-year expansion project that requires an initial fixed asset...
Blue Ribbon, Inc., is considering a new two-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset actually falls into the three-year MARCRS class (as shown in the Table below). Suppose that at the end of the project, the fixed asset will have a market value of $2 million. The project is estimated to generate $4 million in annual sales, with costs of $2 million. The project also requires an initial investment in net...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT