Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 18, Problem 16P
You are evaluating a project that requires an investment of $90 today and provides a single cash flow of $115 for sure one year from now. You decide to use 100% debt financing, that is, you will borrow $90. The risk-free rate is 5% and the tax rate is 40%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $25.
- a. Calculate the
NPV of this investment opportunity using the APV method. - b. Using your answer to part a, calculate the WACC of the project.
- c. Verify that you get the same answer using the WACC method to calculate NPV.
- d. Finally, show that flow-to-equity also correctly gives the NPV of this investment opportunity.
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You are evaluating a project that requires an investment of $102 today and garantees a single cash flow of $127 one year from now. You decide to use 100% debt financing, that is, you will borrow $102. The risk-free rate is 5% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $25.
Calculate the NPV of this investment opportunity using the APV method. (Round to two decimalplaces.)
Using your answer to part (1), calculate the WACC of the project. (Round to two decimalplaces.)
Verify that you get the same answer using the WACC method to calculate NPV. (Round to two decimalplaces.)
Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity. (Round to two decimalplaces.)
You are evaluating a project that requires an investment of
$97
today and garantees a single cash flow of
$115
one year from now. You decide to use
100%
debt financing, that is, you will borrow
$97.
The risk-free rate is
6%
and the tax rate is
30%.
Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe
taxes on the difference between the project cash flow and the investment, that is,
$18.
a. Calculate the NPV of this investment opportunity using the APV method.
b. Using your answer to part
(a),
calculate the WACC of the project.
c. Verify that you get the same answer using the WACC method to calculate NPV.
d. Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity.
You can make an investment that will immediately cost $52,000. If you make the investment, your after-tax operating
profit will be $13,000 per year for five years. After the five years, the profit will be zero, and the scrap value also will be
zero. You will finance the investment with internally generated funds and receive the profit at the end of each year.
The net present value equation for this investment is: NPV=$|
(Carefully enter your answer as an algebraic expression, using the proper notation in the proper format. Do not use the
letter x to denote the multiplication sign.)
Chapter 18 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - In 2015, Intel Corporation had a market...Ch. 18 - Prob. 4PCh. 18 - Suppose Goodyear Tire and Rubber Company is...Ch. 18 - Suppose Alcatel-Lucent has an equity cost of...Ch. 18 - Acort Industries has 10 million shares outstanding...Ch. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - In year 1, AMC will earn 2000 before interest and...Ch. 18 - Prokter and Gramble (PKGR) has historically...Ch. 18 - Amarindo, Inc. (AMR), is a newly public firm with...Ch. 18 - Remex (RMX) currently has no debt in its capital...Ch. 18 - You are evaluating a project that requires an...Ch. 18 - Prob. 17PCh. 18 - You are on your way to an important budget...Ch. 18 - Your firm is considering building a 600 million...Ch. 18 - Prob. 20PCh. 18 - DFS Corporation is currently an all-equity firm,...Ch. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - XL Sports is expected to generate free cash flows...Ch. 18 - Propel Corporation plans to make a 50 million...Ch. 18 - Gartner Systems has no debt and an equity cost of...Ch. 18 - Revtek, Inc., has an equity cost of capital of 12%...
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