Solution-Cost of equity for unlevered

Cost of equity for unlevered

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Reference no: EM132417215

Consider a project with the following information:

The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will contribute $20,000 cash and borrow $80,000 at 6% with an interest-only loan with a maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs. The firm is subject to a 34% corporation tax rate.

The cost of equity for unlevered (ungeared) firm K_u (r_asset) is 12%.

Cost of debt (r_debt) and cost of equity (r_equity) are 6% and 27.84% respectively.

Compute base case NPV, PV of depreciation tax shield, PV of interest tax shield, and the APV of the project.

Reference no: EM132417215

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Cost of equity for unlevered

Reference no: EM132417215

Reference no: EM132417215

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