Texs. Inc. is facing a new investment opportunity that has a similar business risk as its current operation. The project will require $12 million initial investment and is expected to generate volatile cash flow during the first three years. The estimated after tax cash flow during year 1 through 3 is given below. From year 4 the after tax cash flow is expected to grow at a constant growth rate of 2% per year. The company's current balance sheet shows a $2 billion debt in book value and the debt is trading at 80% of book value. The debt beta is 0.6 the market value of equity of the company is 4.8 billion and the equity beta is 1.75. The company has kept a stable capital structure in the past. To take this new investment project, the company will issue $10 million new debt at the current borrowing cost. The under written charges of 1.5% of the debt issue as their total commission. The company plans to gradually reduce borrowing in the first 3 years and then return to its previous stable capital structure. Debt repayment schedule is given below. Assume the corporate tax rate is 21%. Suppose the risk free rate is 2% and the market risk return is 10%
Transcribed Image Text:10%.
Cashflow Forecast in $M
1
3
After-tax Free cash flow
-12.0
2.0
3.0
3.7
Debt Balance at year end (in $ million)
10.0
9.0
8.5
6.5
A. What is the unlevered beta of the company and the return on assets?
B. Calculate the levered cost of capital (return on equity) and after-tax WACC for periods.
with stable capital structure.
C. What is the base case APV?
D. What is the present value of interest tax shield for the first three years?
E. Calculate the APV of this project with financing cost incorporated.
2.
Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
