Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt
Farmers Alliance Limited is considering investing in new equipment with the initial cost
of project/investment to be $100,000. This project is expected to generate EBIT of
$15,000 per year forever (perpetuity). This project or investment can be financed either
with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt
and $60,000 equity. The shareholders required return on an all equity financed project in
this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5%
before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual
and debt does not mature.
Required:
(ii) What is the adjusted net worth of the project?
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