Cash Flow (£) -24,000,000 8,000,000 13,000,000 10,000,000 Year 0 1 2 3 It is planning to issue £12 million of debt, which would incur an interest charge of 9 per cent per annum (to be paid at the end of the year) on the opening balance outstanding at the start of each year. Gaming plc has also committed to discharge £4 million of debt each year to pay-off all the debt over the next three years. Required: i. Determine the unlevered cost of equity with taxes before the debt issue. ii. Calculate the NPV of an all-equity financed project. iii. Determine the NPV of the financing effect.
Cash Flow (£) -24,000,000 8,000,000 13,000,000 10,000,000 Year 0 1 2 3 It is planning to issue £12 million of debt, which would incur an interest charge of 9 per cent per annum (to be paid at the end of the year) on the opening balance outstanding at the start of each year. Gaming plc has also committed to discharge £4 million of debt each year to pay-off all the debt over the next three years. Required: i. Determine the unlevered cost of equity with taxes before the debt issue. ii. Calculate the NPV of an all-equity financed project. iii. Determine the NPV of the financing effect.
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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Transcribed Image Text:Question 3 (Answer all parts of the question.)
a. Gaming plc produces a range of different sporting goods and sell them all over
the world. Its current debt-equity ratio is 50 per cent and levered equity required
rate of return is 16 per cent. It pays corporate tax at a rate of 29.8 per cent.
Gaming plc is looking to expand its current operations, which would generate
following unlevered cash flows:
Year
Cash Flow (£)
-24,000,000
0
1
8,000,000
2
13,000,000
3
10,000,000
It is planning to issue £12 million of debt, which would incur an interest charge of
9 per cent per annum (to be paid at the end of the year) on the opening balance
outstanding at the start of each year. Gaming plc has also committed to
discharge £4 million of debt each year to pay-off all the debt over the next three
years.
Required:
i. Determine the unlevered cost of equity with taxes before the debt issue.
ii. Calculate the NPV of an all-equity financed project.
iii.
Determine the NPV of the financing effect.
Determine the APV of the project.
iv.
v. Should the company choose to expand its operations?
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