Longhorn, Incorporated, has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50 percent and the tax rate is 21 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 1 2 3 Cash Flow -$ 14,800,000 5,500,000 9,000,000 8,700,000 The company has arranged a debt issue of $8.7 million to partially finance the expansion. Under the loan, the company would pay interest of 7 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 $2.9 million per year, completely retiring the issue by the end of the third year. APV Calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
Longhorn, Incorporated, has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50 percent and the tax rate is 21 percent. The required return on the firm's levered equity is 14 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year 1 2 3 Cash Flow -$ 14,800,000 5,500,000 9,000,000 8,700,000 The company has arranged a debt issue of $8.7 million to partially finance the expansion. Under the loan, the company would pay interest of 7 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 $2.9 million per year, completely retiring the issue by the end of the third year. APV Calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem 18-12 APV
Longhorn, Incorporated, has produced rodeo supplies for over 20 years. The
company currently has a debt-equity ratio of 50 percent and the tax rate is 21 percent.
The required return on the firm's levered equity is 14 percent. The company is
planning to expand its production capacity. The equipment to be purchased is
expected to generate the following unlevered cash flows:
Year
O
1
2
3
Cash Flow
-$
14,800,000
5,500,000
9,000,000
8,700,000
The company has arranged a debt issue of $8.7 million to partially finance the
expansion. Under the loan, the company would pay interest of 7 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 $2.9 million per year, completely retiring
the issue by the end of the third year.
APV
Calculate 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)
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