Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
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
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Chapter 18, Problem 8QP
WACC National Electric Company (NEC) is considering a S68 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $4.4 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 6.4 percent and its
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Muscat Metal is evaluating a project that requires an investment of $150 million today and provides a single cash flow of $180 million for sure one year from now. Muscat Metal decides to use 100% debt financing for this investment. The risk-free rate is 5% and Muscat's corporate tax rate is 21%. Assume that the investment is fully depreciated at the end of the year. The NPV of this project using the APV method is closest to:
a. $71 million.
b. $10 million
c. $17 million.
d. $42 million
GoodFish Corporation is considering a new project with a four-year useful life. The initial investment on this project is $1,200,000 immediately. The future cash flows associated with this project are $650,000, $650,000, $650,000, and $856,000 in years 1, 2, 3 and 4, respectively. GoodFish has a target debt–equity ratio of 3, a cost of equity of 10 percent, and a pretax cost of debt of 8 percent. The tax rate is 25%. What is the NPV of this project?
A.
$1,158,843.73
B.
$1,077,782.13
C.
$905,193.80
D.
$1,051,753.51
Digital Organics (DO) has the opportunity to invest $1.06 million now (t = 0) and expects after-tax returns of $660,000 in t = 1 and
$760,000 in t= 2. The project will last for two years only. The appropriate cost of capital is 13% with all-equity financing, the borrowing
rate is 9%, and DO will borrow $360,000 against the project. This debt must be repaid in two equal installments of $180,000 each.
Assume debt tax shields have a net value of $0.40 per dollar of interest paid.
Calculate the project's APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round
your answer to the nearest whole number.)
Adjusted present value
Chapter 18 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - APV How is the APV of a project calculated?Ch. 18 - WACC and APV What is the main difference between...Ch. 18 - FTE What is the main difference between the FTE...Ch. 18 - Prob. 4CQCh. 18 - Prob. 5CQCh. 18 - NPV and APV Zoso is a rental car company that is...Ch. 18 - APV Gemini, Inc., an all-equity firm, is...Ch. 18 - Prob. 3QPCh. 18 - Prob. 4QPCh. 18 - Prob. 5QP
Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - WACC National Electric Company (NEC) is...Ch. 18 - WACC Bolero, Inc., has compiled the following...Ch. 18 - Prob. 10QPCh. 18 - Prob. 11QPCh. 18 - APV MVP, Inc., has produced rodeo supplies for...Ch. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Prob. 15QPCh. 18 - Prob. 16QPCh. 18 - Prob. 17QPCh. 18 - Prob. 18QPCh. 18 - Prob. 1MC
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