Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new proje The company currently has a target debt-equity ratio of .45, but the industry target del equity ratio is .50. The industry average beta is 1.10. The market risk premium is 6 percent and the risk-free rate is 4.5 percent. Assume all companies in this industry c issue debt at the risk-free rate. The corporate tax rate is 23 percent. The project requir an initial outlay of $825,000 and is expected to result in a $101,000 cash inflow at t end of the first year. The project will be financed at the company's target debt-equ ratio. Annual cash flows from the project will grow at a constant rate of 5 percent un
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new proje The company currently has a target debt-equity ratio of .45, but the industry target del equity ratio is .50. The industry average beta is 1.10. The market risk premium is 6 percent and the risk-free rate is 4.5 percent. Assume all companies in this industry c issue debt at the risk-free rate. The corporate tax rate is 23 percent. The project requir an initial outlay of $825,000 and is expected to result in a $101,000 cash inflow at t end of the first year. The project will be financed at the company's target debt-equ ratio. Annual cash flows from the project will grow at a constant rate of 5 percent un
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Man.9
Transcribed Image Text:Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project.
The company currently has a target debt-equity ratio of .45, but the industry target debt-
equity ratio is .50. The industry average beta is 1.10. The market risk premium is 6.9
percent and the risk-free rate is 4.5 percent. Assume all companies in this industry can
issue debt at the risk-free rate. The corporate tax rate is 23 percent. The project requires
an initial outlay of $825,000 and is expected to result in a $101,000 cash inflow at the
end of the first year. The project will be financed at the company's target debt-equity
ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until
the end of the fifth year and remain constant forever thereafter.
Calculate the NPV of the project. (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
> Answer is complete but not entirely correct.
NPV
$
52,207.84 X
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