Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
| cost of debt | 8% | ||
| unlevered cost of capital | 10% | ||
| systematic risk of asset | 1.5 | ||
| 1) | |||
| Unlevered Firm | Levered Firm | ||
| EBIT | 10000 | 10000 | |
| Interest | 0 | 3200 | |
| Taxable Income | 10000 | 6800 | |
| 34% | Tax | 3400 | 2312 |
| Net Income | 6600 | 4488 | |
| CFFA | 0 | -3200 | |
| 2) | PV of the tax shield? | ||
| Value of levered firm | 3200 | ||
| tax rate | 34% | ||
| (value of levered firm*tax rate)/(1+cost of debt) | |||
| PV of tax shield | 1007.41 | ||
| value of levered firm/cost of debt | |||
| 3) | Size of debt | 40000 | |
| 4) | |||
| a) | EBIT(1-T)/cost of capital | ||
| Value of unlevered firm | 66000 | ||
| b) | value of unlevered firm+Tax*size of debt | ||
| Value of levered firm | 79600 | ||
| c) | total value of unlevered firm-debt | ||
| Equity value | 39600 | ||
| d) | cost of capital+(debt/equity)(cost of capital-cost of debt) | ||
| cost of equity | 12.02% | ||
| e) | wacc formula | ||
| equity/value of levered firm*cost of equity+debt/value of levereed firm*cost of debt*(1-T) | |||
| cost of capital (levered) | 8.63% | ||
| f) | systematic risk of asset*(1+((1-T)*(debt/equity))) | ||
| systematic risk of equity | 2.5 |
Hi I really need help with this question! Attached is the picture with the cash flows of the two projects! Thank you!
- Based on the results of question (4), if there are the following two mutually exclusive projects. What is the crossover required
rate of return for the two projects?
Transcribed Image Text:Project A Cash Flow
Project B Cash Flow
Year
- $75,000
- $75,000
0
$26,300
$24,000
$29,500
$26,900
2
$45,300
$51,300
3
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