Present value of interest tax shield associated with project

Assignment Help Financial Management
Reference no: EM131939802

You are on your way to an important budget meeting. In the elevator, you review the project valuation analysis you had your summer associate prepare for one of the projects to be discussed: LOADING... Looking over the spreadsheet, you realize that while all of the cash flow estimates are correct, your associate used the flow-to-equity valuation method and discounted the cash flows using the company's equity cost of capital of 11 %. However, the project's incremental leverage is very different from the company's historical debt-equity ratio of 0.20: For this project, the company will instead borrow $80 million upfront and repay $ 20 million in year 2, $20 million in year 3, and $ 40 million in year 4. Thus, the project's equity cost of capital is likely to be higher than the firm's, not constant over timelong dash —invalidating your associate's calculation.

Clearly, the FTE approach is not the best way to analyze this project. Fortunately, you have your calculator with you, and with any luck you can use a better method before the meeting starts.

a. What is the present value of the interest tax shield associated with this project?

b. What are the free cash flows of the project?

c. What is the best estimate of the project's value from the information given?

Reference no: EM131939802

Questions Cloud

Interest rate risk of coupon bond is higher when the bond : Holding other factors constant, the interest rate risk of a coupon bond is higher when the bond's:
What is an equity carve-out : Suppose that a Canadian buys a car from Germany with cash. What is an Equity Carve-out?
Share price by having higher dividend payout ratio : According to the Clientele Effect, investors like high dividends because a fimr can boost its share price by having a higher dividend payout ratio.
Relationship between bond prices and interest rates : We learned that there is an indirect relationship between bond prices and interest rates.
Present value of interest tax shield associated with project : What is the present value of the interest tax shield associated with this project? What are the free cash flows of the project?
What are some likely explanations for these results : What are some likely explanations for these results?
Outsourcing and in-house assembly of homenet discussed : Consider again the choice between outsourcing and in-house assembly of HomeNet discussed in Section 8.3 and analyzed in Table 8.6,
Calculate the price of the synthetic option : Calculate the price of the synthetic option and compare with the price of the actual option. Comment on your answer.
Developer of advanced security systems : IDX Technologies is a privately held developer of advanced security systems based in Chicago.

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd