Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 19, Problem 16PS
APV Digital Organics (DO) has the opportunity to invest $1 million now (t = 0) and expects after-tax returns of $600,000 in t = 1 and $700,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 12% with all-equity financing, the borrowing rate is 8%, and DO will borrow $300.000 against the project. This debt must be repaid in two equal installments of $150,000 each. Assume debt tax shields have a net value of $.30 per dollar of interest paid. Calculate the project’s APV using the procedure followed in Table 19.2.
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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
igital Organics (DO) has the opportunity to invest $1.03 million now (t = 0) and expects after
2. The project will last for two years
=
- tax returns of $630,000 in t = 1 and $730,000 in t
only. The appropriate cost of capital is 11% with all - equity financing, the borrowing rate is
7%, and DO will borrow $330,000 against the project. This debt must be repaid in two equal
installments of $165,000 each. Assume debt tax shields have a net value of $0.20 per dollar of
interest paid. Calculate the project's APV.
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:
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b. $10 million
c. $17 million.
d. $42 million
Chapter 19 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - Prob. 2QCh. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - Prob. 7PSCh. 19 - APV Consider a project lasting one year only. The...
Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 10PSCh. 19 - Prob. 11PSCh. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - WACC How will Rensselaer Felts WACC and cost of...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - APV Consider another perpetual project like the...Ch. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 25PSCh. 19 - Prob. 26PS
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