Chapter 13, Problem 22QAP

Summary Introduction

Adequate information:

Debt-equity ratio $\left(\text{D/E}\right)$ = 0.40

Debt $\left(\text{D}\right)$ = 0.40

Equity $\left(\text{E}\right)$ = 1

Project cost $\left({\text{C}}_{\text{P}}\right)$ = $60,000,000

After-tax cash flows $\left({\text{CF}}_{\text{AT}}\right)$ = $9,600,000

Equity flotation cost $\left({\text{f}}_{\text{e}}\right)$ = 7%

Required return $\left({\text{R}}_{\text{e}}\right)$ = 13%

Debt flotation cost $\left({\text{f}}_{\text{d}}\right)$ = 2%

Coupon rate $\left(\text{CR}\right)$ = 6%

Target A/P to LTD $\left(\text{AP/LTD}\right)$ = 20%

Accounts payable $\left(\text{AP}\right)$ = 0.20

Long-term debt $\left(\text{LTD}\right)$ = 1

A/P flotation cost $\left({\text{f}}_{\text{A/P}}\right)$ = 0%

Tax rate $\left(\text{t}\right)$ = 21%

To compute: Net present value for the company P.

Introduction: The term Net present value (NPV) refers to the difference between the present value of cash inflows and the initial outlay.