Oklahoma Tech has $500,000 of debt on its balance sheet and pays corporate taxes at the 30% rate. The CEO of Oklahoma Tech faces an investment opportunity that requires an initial investment of $360,000 in new machinery and is expected to generate annual cash flows (before tax) of $30,000 in the first year and $40,000 in the second year that remains the same for many years to come. The unlevered cost of capital is 10%. What is the value of the project if Thunder Tech decides to issue $100,000 in bonds at an interest rate of 8% to finance the project? The debt level is fixed in perpetuity and the risk of tax shields is the same as the risk of debt.
Oklahoma Tech has $500,000 of debt on its balance sheet and pays corporate taxes at the 30% rate. The CEO of Oklahoma Tech faces an investment opportunity that requires an initial investment of $360,000 in new machinery and is expected to generate annual cash flows (before tax) of $30,000 in the first year and $40,000 in the second year that remains the same for many years to come. The unlevered cost of capital is 10%. What is the value of the project if Thunder Tech decides to issue $100,000 in bonds at an interest rate of 8% to finance the project? The debt level is fixed in perpetuity and the risk of tax shields is the same as the risk of debt.
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
Related questions
Question
Oklahoma Tech has $500,000 of debt on its
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
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
Publisher:
McGraw-Hill Education