Corporate Finance Question At the moment Lauren Co. keeps a constant debt-to-equ
ID: 2718203 • Letter: C
Question
Corporate Finance Question
At the moment Lauren Co. keeps a constant debt-to-equity ratio equal to 1, its wacc is 13% and its cost of debt is 2.50%. Moreover the company's debt bears no systematic risk.
Lauren is thinking to raise $20,000,000 to acquire the assets for a new, 7 year-long, project. The assets of this new project are as risky as the other assets of the firm. This new venture will be separated from the rest of the company's operations. As the new project is short-lived, Lauren's management think to keep a constant amount of debt equal to 30% of the initial asset value. The cost of debt for the new project is the same as the cost of the other debt issued by the company. The assets of the project will be depreciated straight line through the life of the project, and the present value of depreciation tax benefits for the first year is 709,171.50.
The corporate tax rate is 26%. Assuming that the annual expected net income from the project is $14,534,000, what is the NPV of the project?
Explanation / Answer
Ans)
net Income 14534000 less Tax @26% 3778840 Inflow Aftert Tax 10755160 Add Depriciation 2857142.857 Inflow befor Dep 13612302.86 PVAF for 7 years @13% 4.423 Present value of Inflow 60207215.54 Less Cost of Project 20000000 NPV 40207215.54 Working Dep 20000000/7 2857142.857