Longhorn, Incorporated, has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 55 percent and the tax rate is 23 percent. The required return on the firm's levered equity is 14 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year 0 1 2 3 Cash Flow -$ 18,400,000 5,740,000 9,540,000 8,840,000 The company has arranged a debt issue of $9.42 million to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of $3,140,000 per year, completely retiring the issue by the end of the third year. What is the APV of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) APV Answer is complete but not entirely correct. $ -5,334,389.29
Longhorn, Incorporated, has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 55 percent and the tax rate is 23 percent. The required return on the firm's levered equity is 14 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year 0 1 2 3 Cash Flow -$ 18,400,000 5,740,000 9,540,000 8,840,000 The company has arranged a debt issue of $9.42 million to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of $3,140,000 per year, completely retiring the issue by the end of the third year. What is the APV of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) APV Answer is complete but not entirely correct. $ -5,334,389.29
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:Problem 18-12 APV
Longhorn, Incorporated, has produced rodeo supplies for over 20 years. The company
currently has a debt-equity ratio of 55 percent and the tax rate is 23 percent. The
required return on the firm's levered equity is 14 percent. The company is planning to
expand its production capacity. The equipment to be purchased is expected to generate
the following unlevered cash flows:
Year
O
123
Cash Flow
-$
18,400,000
5,740,000
9,540,000
8,840,000
The company has arranged a debt issue of $9.42 million to partially finance the
expansion. Under the loan, the company would pay interest of 9 percent at the end of
each year on the outstanding balance at the beginning of the year. The company also
would make year-end principal payments of $3,140,000 per year, completely retiring the
issue by the end of the third year. What is the APV of the project? (Do not round
intermediate calculations and enter your answer in dollars, not millions of dollars,
rounded to 2 decimal places, e.g., 1,234,567.89)
X Answer is complete but not entirely correct.
APV
$ -5,334,389.29 X
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