Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 18, Problem 2QP
APV Gemini, Inc., an all-equity firm, is considering an investment of $1.4 million that will be
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Knotts, Incorporated, an all-equity firm, is considering an investment of $1.89 million that
will be depreciated according to the straight-line method over its four-year life. The
project is expected to generate earnings before taxes and depreciation of $616,000 per
year for four years. The investment will not change the risk level of the firm. The
company can obtain a four-year, 9.6 percent loan to finance the project from a local
bank. All principal will be repaid in one balloon payment at the end of the fourth year.
The bank will charge the firm $66,000 in flotation fees, which will be amortized over the
four-year life of the loan. If the company financed the project entirely with equity, the
firm's cost of capital would be 11 percent. The corporate tax rate is 25 percent. Using the
adjusted present value method, calculate the APV of the project. (Do not round
intermediate calculations and enter your answer in dollars, not millions of dollars,
rounded to 2 decimal places, e.g.,…
Gemini, Inc., an all-equity firm, is considering a $1.7 million investment that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $595,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.5 percent loan to finance the project from a local bank. They will receive the total amount needed for investment ($1.7 million at time 0 and all principal will be repaid in one balloon payment at the end of the fourth year (similar to a bond). Every year the company would need to pay interest (@9.5%). If the company finances the project entirely with equity, the firm’s cost of capital would be 13 percent. The corporate tax rate is 30 percent. Calculate the cash flows and NPV for the two cases:
Chapter 18 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - APV How is the APV of a project calculated?Ch. 18 - WACC and APV What is the main difference between...Ch. 18 - FTE What is the main difference between the FTE...Ch. 18 - Prob. 4CQCh. 18 - Prob. 5CQCh. 18 - NPV and APV Zoso is a rental car company that is...Ch. 18 - APV Gemini, Inc., an all-equity firm, is...Ch. 18 - Prob. 3QPCh. 18 - Prob. 4QPCh. 18 - Prob. 5QP
Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - WACC National Electric Company (NEC) is...Ch. 18 - WACC Bolero, Inc., has compiled the following...Ch. 18 - Prob. 10QPCh. 18 - Prob. 11QPCh. 18 - APV MVP, Inc., has produced rodeo supplies for...Ch. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Prob. 15QPCh. 18 - Prob. 16QPCh. 18 - Prob. 17QPCh. 18 - Prob. 18QPCh. 18 - Prob. 1MC
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