EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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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.

  1. a. Calculate the NPV of this investment opportunity using the APV method.
  2. b. Using your answer to part a, calculate the WACC of the project.
  3. c. Verify that you get the same answer using the WACC method to calculate NPV.
  4. 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 $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 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 decimal​places.) Using your answer to part ​(1), calculate the WACC of the project. ​(Round to two decimal​places.) Verify that you get the same answer using the WACC method to calculate NPV. ​(Round to two decimal​places.) Finally, show that​ flow-to-equity method also correctly gives the NPV of this investment opportunity. ​(Round to two decimal​places.)
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.)

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EBK CORPORATE FINANCE

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