Chapter 18, Problem 9P

a)

Summary Introduction

To determine: The unlevered cost of capital for Company AL.

Introduction:

The unlevered cost of capital is an assessment that uses either an actual debt-free or a hypothetical to measure a firm’s cost to implement a particular capital project. The unlevered cost of capital must demonstrate the project is less expensive than a levered cost of capital.

b)

Summary Introduction

To determine: The unlevered value for the project.

Introduction:

Unlevered cost of capital is an assessment that uses either an actual debt-free or a hypothetical to measure a firm’s cost to implement a particular capital project. The unlevered cost of capital must demonstrate the project is less expensive than a levered cost of capital.

c)

Summary Introduction

To determine: The interest tax shield for the project and the present values.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction such as depreciation, charitable donations, and mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

The present value is the existing value of a future amount of money or stream of cash flows that gives a stated rate of return.

d)

Summary Introduction

To determine: The average presented value (APV) for Company AL using WACC method.

Introduction:

Weighted Average Cost of Capital (WACC) is the rate at which a company is expected to pay, on an average, to all the security holders in order to finance its assets.

An adjusted present value (APV) is the net present value of a project if financed exclusively by equity plus the present value of any financing welfares that are the additional effect of debt.