Question

QUESTION 8

[Q08-Q10] You work for First Bank of Texas, a regional bank that operates in the Houston area. The bank is thinking about expanding into Louisiana. This expansion will require an investment of $10M in free cash flows today, but will generate $2M in free cash flows every year forever. Financing for the expansion will consist of 10% equity and 90% debt. You use CAPM to estimate your cost of equity to be 25%, and this will be stable over time. Your cost of debt, however, is difficult to estimate—your debt consists of deposits, long-term debt, short-term debt, investment grade debt, and debt with different levels of collateral.

However, you do know how much your debt will change over time, and the amount of your interest payments. To finance the project, you will issue a total of $8.5M in debt today, and this debt will stay constant. You will also need to make interest payments of 7% every year forever on the $8.5M in debt. You will also need to make interest payments of 7% every year forever on the $8.5M in debt. Your tax rate is 30%.

What is the FCFE at time 0 (i.e. today)? (Hint: Since you just issued the debt, the interest payment at time 0 is simply zero.)

	A.	+$1.5M
	B.	+$1.0M
	C.	-$1.0M
	D.	-$1.5M

QUESTION 9

From time 1 onward, what is the FCFE every year?

	A.	+$1.5835M
	B.	+$1.4835M
	C.	-$1.4835M
	D.	-$1.5835M

  

QUESTION 10

What is the NPV of the expansion according to FTE?

	A.	+$5.835M
	B.	+$4.834M
	C.	-$4.834M
	D.	-$5.835M

Please show all work in steps to final answer.

Answer 1