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  3. a new project is expected to have a fcf of $6m one

A new project is expected to have a FCF of $6M one year from today....

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Accounting

A new project is expected to have a FCF of $6M one year from today. The yearly cashflows will increase by 3% per year, forever. Youve found a comparable firm that takes on similar projects and has an expected return on equity of 10%, an expected return on debt of 6%, and a D/E ratio of 1. Youve decided to keep aconstant interest coverage ratio of 20% for the project. Your cost of debt holders is 4% and the corporate tax rate is 40%. How much will the first interest payment to debt holders be (paid at time 1)? How much debt should the project have at time 0 in order to achieve this first interest payment? What is the PV of the debt tax shield (the PV of all of the projects tax savings due to interest payments)

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