You are considering a project with an initial investment of $14 million and annual cash flow...

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Finance

You are considering a project with an initial investment of $14million and annual cash flow (before interest and taxes) of$2,000,000. The projectâ€™s cash flow is expected to continueforever. The tax rate is 34%, the firmâ€™s unlevered cost of equityis 12% and its pre-tax cost of debt is 10%. The only side-effectfrom the use of debt that you are concerned about is related to thetax shield.
If the project were to be financed with 100% equity, would youaccept the project?
If the project were to be financed with $5 million in perpetualdebt and the rest with equity, use the APV method to help youdecide whether to accept the project or not. Does your decisionchange from part (a)?
Redo part (b) by using the FTE approach.
Redo part (b) by using the WACC approach.
What is the minimum level of debt you would have to use inorder to accept this project?

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3.8 Ratings (781 Votes)

a If the project to be financed by 100 equity Initial Investment 14 million Annual Cash Flow before interest and taxes 2000000 Since interest is zero as it is equityfinanced Annual Cash Flow after taxes Free cash flow 20000001034 1320000 Unlevered cost of Equity 12 Now Calculating Net Present Value NPV NPV 14000000 1320000012 3 million Since net See Answer

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