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
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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.
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