Given the following cash flows:
Year 
0 
1 
2 
3 
CF 
3,500 
600 
1,000 
Cash flow will grow at a constant rate g=6% 
We choose the following capital structure plan:
Debt 
Equity 

Plan 
30% 
70% 
Equity Benchmark:
The unlevered beta is 2, tax rate is 40%. Market Return is 16%, riskfree rate is 3%.
Debt Benchmark:
Par:100, Annual Coupon: 6%, 10year to maturity, Selling at $88.43
What is the NPV of the project?
a 
1728.42 

b 
917.53 

c 
2231.98 

d 
860.42 
Levered Beta = 2[1 + (1  0.40)(0.30/0.70)]
Levered Beta = 2.514
As per CAPM Model,
Cost of Equity = Rf + Beta(Rm  Rf)
Cost of Equity = 0.03 + 2.514(0.16  0.03)
Cost of Equity = 35.69%
Calculating Cost of debt,
Using TVM Calculation,
I = [FV = 100, T = 10, PMT = 6, PV = 88.43]
Cost of Debt = 7.70%
WACC = 0.30(1  0.40)(0.077) + 0.70(0.3569)
WACC = 26.37%
So,
Value of Project = 3,500 + 600/(1.2637) + 1,000/(1.2637)^{2} + 1,000(1.06)/(0.2637  0.06)(1.2637)^{2}
Value of Project= $860.42
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