Vijay Knotts, Incorporated, an all-equity firm, is considering an investment of $1.81 million thatwill be depreciated according to the straight-line method over its four-year life. Theproject is expected to generate earnings before taxes and depreciation of $607,000 peryear for four years. The investment will not change the risk level of the firm. Thecompany can obtain a four-year, 8.7 percent loan to finance the project from a localbank. All principal will be repaid in one balloon payment at the end of the fourth year.The bank will charge the firm $57,000 in flotation fees, which will be amortized-over thefour-year life of the loan. If the company financed the project entirely with equity, thefirm's cost of capital would be 12 percent. The corporate tax rate is 21 percent. Using theadjusted present value method, calculate the APV of the project. (Do not roundintermediate calculations and enter your answer in dollars, not millions of dollars,rounded to 2 decimal places, e.g., 1,234,567.89)APV

Calculating the Adjusted Present Value (APV) of the ProjectHere's how to calculate the APV of the…

Answered: Knotts, Incorporated, an all-equity…

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

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Digital Organics (DO) has the opportunity to invest $1.06 million now (t = 0) and expects after-tax returns of $660,000 in t = 1 and $760,000 in t= 2. The project will last for two years only. The appropriate cost of capital is 13% with all-equity financing, the borrowing rate is 9%, and DO will borrow $360,000 against the project. This debt must be repaid in two equal installments of $180,000 each. Assume debt tax shields have a net value of $0.40 per dollar of interest paid. Calculate the project's APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number.) Adjusted present value
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:
Muscat Metal is evaluating a project that requires an investment of $150 million today and provides a single cash flow of $180 million for sure one year from now. Muscat Metal decides to use 100% debt financing for this investment. The risk-free rate is 5% and Muscat's corporate tax rate is 21%. Assume that the investment is fully depreciated at the end of the year. The NPV of this project using the APV method is closest to: a. $71 million. b. $10 million c. $17 million. d. $42 million
igital Organics (DO) has the opportunity to invest $1.03 million now (t = 0) and expects after 2. The project will last for two years = - tax returns of $630,000 in t = 1 and $730,000 in t only. The appropriate cost of capital is 11% with all - equity financing, the borrowing rate is 7%, and DO will borrow $330,000 against the project. This debt must be repaid in two equal installments of $165,000 each. Assume debt tax shields have a net value of $0.20 per dollar of interest paid. Calculate the project's APV.
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
Polycorp is considering an investment in new plant of $3.15 million. The project will bepartially financed with a loan of $2,000,000 which will be repaid over the next five years inequal annual end of year instalments at a rate of 6.25 percent pa. Assume straight-linedepreciation over a five-year life, and no taxes. The projects cash flows before loan repaymentsand interest are shown in the table below. Cost of capital is 12.65% pa (the required rate ofreturn on the project). A salvage value of $255,000 is expected at the end of year five and isincluded in the cash flows for year five below. Ignore taxes and inflation.Year Year One Year Two Year Three Year Four Year FiveCash Inflow 890,000 830,000 815,000 910,000 1045,000You are required to calculate:(1) The amount of the annual loan repayment and produce a repayment schedule.(2) NPV of the project (to the nearest dollar)(3) IRR of the project (as a percentage to two decimal places)(4) AE, the annual equivalent for the project (AE or…
Polycorp is considering an investment in new plant of $3.15 million. The project will bepartially financed with a loan of $2,000,000 which will be repaid over the next five years inequal annual end of year instalments at a rate of 6.25 percent pa. Assume straight-linedepreciation over a five-year life, and no taxes. The projects cash flows before loan repaymentsand interest are shown in the table below. Cost of capital is 12.65% pa (the required rate ofreturn on the project). A salvage value of $255,000 is expected at the end of year five and isincluded in the cash flows for year five below. Ignore taxes and inflation.Year Year One Year Two Year Three Year Four Year FiveCash Inflow 890,000 830,000 815,000 910,000 1045,000You are required to calculate: (4) AE, the annual equivalent for the project (AE or EAV) (to the nearest dollar)(5) PB, the payback and discounted payback in years (to one decimal place)(6) ARR, the accounting rate of return (gross and net) (to two decimal places)
Gigantic Group has prepared the following estimates for a long-term expansion project. The initial investment is $248,250, and the project is expected to yield after-tax cash inflows of $65,000 per year for 5 years. The firm has an 8% cost of capital. Would you recommend that the firm accept or reject the project? Explain your
WellyWeta workshop is considering buying a machine that costs $545,000. The machine will bedepreciated over five years by the straight-line method and will be worthless at that time. Thecompany can lease the machine with year-end payments of $140,000. The company can issue bondsat an interest rate of 7 percent. If the corporate tax rate is 21 percent, should the company buy orlease?
White Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that White Lion expects to earn on its project (net of its flotation costs) is (rounded to two decimal places).
White Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that White Lion expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Alpha Moose Transporters has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.45 at the end of the year. The company's earnings and dividends' growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If Alpha Moose expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be White Lion Homebuilders Co.'s addition to earnings for this year is expected to be…

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