Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project....

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Blue Angel, Inc., a private firm in the holiday gift industry,is considering a new project. The company currently has a targetdebt-equity ratio of .45, but the industry target debt-equity ratiois .40. The industry average beta is 1.10. The market risk premiumis 6.1 percent and the risk-free rate is 4.7 percent. Assume allcompanies in this industry can issue debt at the risk-free rate.The corporate tax rate is 25 percent. The project requires aninitial outlay of $885,000 and is expected to result in a $113,000cash inflow at the end of the first year. The project will befinanced at the company’s target debt-equity ratio. Annual cashflows from the project will grow at a constant rate of 4 percentuntil the end of the fifth year and remain constant foreverthereafter.
Calculate the NPV of the project.

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AnswerIndustry target debtequity ratio is 40The industry average beta is 110The corporate tax rate is 25 percentUnlevered beta Levered beta 1 1 tax rate Debt Equity 110 1 1 25 040 1 040 110 1 1 25 040 1 040 See Answer

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Blue Angel, Inc., a private firm in the holiday gift industry,is considering a new project. The company currently has a targetdebt-equity ratio of .45, but the industry target debt-equity ratiois .40. The industry average beta is 1.10. The market risk premiumis 6.1 percent and the risk-free rate is 4.7 percent. Assume allcompanies in this industry can issue debt at the risk-free rate.The corporate tax rate is 25 percent. The project requires aninitial outlay of $885,000 and is expected to result in a $113,000cash inflow at the end of the first year. The project will befinanced at the company’s target debt-equity ratio. Annual cashflows from the project will grow at a constant rate of 4 percentuntil the end of the fifth year and remain constant foreverthereafter.Calculate the NPV of the project.