A 237. Benton is a rental car company that is trying to determine whether to add 25 cars to itsfleet. The company fully depreciates all its rental cars over four years using the straight-line method. The new cars are expected to generate $250,000 per year in earningsbefore taxes and depreciation for four years. The company is entirely financed by equityand has a 22 percent tax rate. The required return on the company's unlevered equity is11 percent and the new fleet will not change the risk of the company. The risk-free rate is6 percent.a. What is the maximum price that the company should be willing to pay for the newfleet of cars if it remains an all-equity company? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g., 32.16.)b. Suppose the company can purchase the fleet of cars for $620,000. Additionally,assume the company can issue $360,000 of four-year debt to finance the project atthe risk-free rate of 6 percent. All principal will be repaid in one balloon payment atthe end of the fourth year. What is the APV of the project? (Do not roundintermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)a.b. APVMaximum price

APV. ( Adjusted present value.)is the net present value of the project if it were funded completely…

Answered: Benton is a rental car company that is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 11P

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Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over six years using the straight- line method. The new cars are expected to generate $195,000 per year in earnings before taxes and depreciation for six years. The company is entirely financed by equity and has a 23 percent tax rate. The required return on the company's unlevered equity is 12 percent and the new fleet will not change the risk of the company. The risk-free rate is 5 percent. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the company can purchase the fleet of cars for $700,000. Additionally, assume the company can issue $520,000 of six-year debt to finance the project at the risk-free rate of 5 percent. All principal will be repaid in…
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