Question

[Q18-Q23] You are evaluating a 1-year project that is in line with the firm’s existing business....

[Q18-Q23] You are evaluating a 1-year project that is in line with the firm’s existing business. Specifically, this new project requires an investment of $1,200 in free cash flow today, but will generate $1,600 one year from today. The project will be partially financed with a 1-year maturity debt whose face value is $200 and interest rate is 10%.

Suppose that you estimated the cost of equity as 20%, based on the firm’s stock data. However, you were not able to estimate the cost of debt because your firm’s total debt consists of long-term debt, short-term debt, investment grade debt, and debt with different levels of collateral. Assume that the corporate tax rate is 30%.

Under the FTE approach, the NPV of the project is obtained by discounting future FCFE using the _______.

A.

Cost of assets

B.

Cost of unlevered equity

C.

Weighted average cost of capital

D.

Cost of levered equity

What is the NPV of this project?

A.

$21

B.

$14

C.

$80

D.

$155

Homework Answers

Answer #1

Under the FTE approach, the NPV of the project is obtained by discounting future FCFE using the _______.

here we have Free Cash Flow from equity, as the cash flow is from equity, we have to use Cost of equity to value of company's equity. Now there are two Cost of equities: Levered and Unlevered. we use Levered cost of equity because the company has long term debt in their capital structure.

Thus Cost of Levered Equity

2. NPV of project = (Cash Inflow in Year 1 - Debt - Interest * (1 - Tax)] / (1 + Cost of equity) - Cash Outflow

NPV of project = (1600 - 200 - 20 * (1 - 0.30)] / (1 + 0.20) - 1000

NPV of project = 1155 - 1000

NPV of project = $155 Option D

Please dont forget to upvote

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. You are evaluating a 1-year project that is in line with the firm’s existing business....
1. You are evaluating a 1-year project that is in line with the firm’s existing business. Specifically, this new project requires an investment of $1,200 in free cash flow today, but will generate $1,600 one year from today. The project will be partially financed with a 1-year maturity debt whose face value is $200 and interest rate is 10%. Suppose that you estimated the cost of equity as 20%, based on the firm’s stock data. However, you were not able...
QUESTION 24 [Q24-35] Your firm’s market value balance sheet is given as follows: Market Value Balance...
QUESTION 24 [Q24-35] Your firm’s market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M Equity $300M Asset Value $530M Debt + Equity $530M Assume that the you plan to keep the firm’s debt-to-equity ratio fixed. The firm’s corporate tax rate is 50%. The firm’s cost of debt is 10% and cost of equity is 20%. Now, suppose that you are considering a new project that will last for one...
Question 24 [Q24-35] Your firm’s market value balance sheet is given as follows: Market Value Balance...
Question 24 [Q24-35] Your firm’s market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M Equity $300M Asset Value $530M Debt + Equity $530M Assume that the you plan to keep the firm’s debt-to-equity ratio fixed. The firm’s corporate tax rate is 50%. The firm’s cost of debt is 10% and cost of equity is 20%. Now, suppose that you are considering a new project that will last for one...
Your firm’s market value balance sheet is given as follows: Market Value Balance Sheet Excess cash...
Your firm’s market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M Equity $300M Asset Value $530M Debt + Equity $530M Assume that the you plan to keep the firm’s debt-to-equity ratio fixed. The firm’s corporate tax rate is 50%. The firm’s cost of debt is 10% and cost of equity is 20%. Now, suppose that you are considering a new project that will last for one year. According to...
8. An all-equity firm is considering financing its next investment project with a combination of equity...
8. An all-equity firm is considering financing its next investment project with a combination of equity and debt. The asset beta for the firm as a whole is 1.2 (recall that this is the same as the equity beta for an all-equity firm, but not the same as the equity beta for a “levered” firm). Assume the average rate of return on the market is 6% and the risk-free rate is 1%. The cost of debt for the company is...
QUESTION 8 [Q08-Q10] You work for First Bank of Texas, a regional bank that operates in...
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...
Eyesore Electric Scooters is opening a new branch in Lincoln today. Their unlevered cost of equity...
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...
23. You are evaluating a project with initial investment (at year 0) of $240,000 that is...
23. You are evaluating a project with initial investment (at year 0) of $240,000 that is expected to produce annual profits of $20,000 for 10 years starting at year 1. After the project ends, there is an abandonment cost of $23,000 at year 11. If your firm’s cost of capital is 11.00%, what is the net present value (NPV) of this project? (a) $-145,215.36 (b) $-129,512.88 (c) $-63,000.00 (d) $-122,215.36
Consider a project with free cash flow in one year of $140,738 or $162,796​, with either...
Consider a project with free cash flow in one year of $140,738 or $162,796​, with either outcome being equally likely. The initial investment required for the project is $80,000​, and the​ project's cost of capital is 18%. The​ risk-free interest rate is 11%. ​(Assume no taxes or distress​ costs.) a. What is the NPV of this​ project? b. Suppose that to raise the funds for the initial​ investment, the project is sold to investors as an​ all-equity firm. The equity...
A firm is evaluating a four-year project that requires an investment today of $2.6 million. In...
A firm is evaluating a four-year project that requires an investment today of $2.6 million. In addition, the project will require a one-time injection of working capital of $222,000 today that will be recovered at project end. The project is estimated to provide operating cash flows of $615,000 each year for the four years. The firm’s discount rate is 8.5%. What is the NPV of the project?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT