Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The new cars are expected to generate $150,000 per year in earnings before taxes and depreciation for five years. The company is entirely financed by equity and has a 35 percent tax rate. The required return on the company's unlevered equity is 14 percent, and the new fleet will not change the risk of the company. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Maximum price b. Suppose the company can purchase the fleet of cars for $370,000. Additionally, assume the company can issue $210,000 of five-year, 6 percent debt to finance the project. All principal will be repaid in one balloon payment at the end of the fifth year. What is the APV of the project? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Adjusted present value
Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The new cars are expected to generate $150,000 per year in earnings before taxes and depreciation for five years. The company is entirely financed by equity and has a 35 percent tax rate. The required return on the company's unlevered equity is 14 percent, and the new fleet will not change the risk of the company. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Maximum price b. Suppose the company can purchase the fleet of cars for $370,000. Additionally, assume the company can issue $210,000 of five-year, 6 percent debt to finance the project. All principal will be repaid in one balloon payment at the end of the fifth year. What is the APV of the project? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Adjusted present value
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:Zoso is a rental car company that is trying to determine whether to add 25 cars
to its fleet. The company fully depreciates all its rental cars over five years
using the straight-line method. The new cars are expected to generate
$150,000 per year in earnings before taxes and depreciation for five years. The
company is entirely financed by equity and has a 35 percent tax rate. The
required return on the company's unlevered equity is 14 percent, and the new
fleet will not change the risk of the company.
a. What is the maximum price that the company should be willing to pay for the
new fleet of cars if it remains an all-equity company? (Do not round
intermediate calculations. Round the final answer to 2 decimal places. Omit
$ sign in your response.)
Maximum price
b. Suppose the company can purchase the fleet of cars for $370,000.
Additionally, assume the company can issue $210,000 of five-year, 6 percent
debt to finance the project. All principal will be repaid in one balloon payment
at the end of the fifth year. What is the APV of the project? (Do not round
intermediate calculations. Round the final answer to 2 decimal places. Omit
$ sign in your response.)
Adjusted present value
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