Question

Question 28 10 points Save Answ Canyon Buff Corp. has a stock price of $12 per share with 5 million shares outstanding and an enterprise value of $100 million. The firm has an equity beta of 1.2 and a debt beta of 0.4.Assume the risk-free interest rate is 2% and expected market risk premium is 5%. Canyon Buff faces a marginal tax rate of 30%. What is the NPV (in the unit of million dollars) of the firm's project with average risk and the following expected free cash flows? (E.g., if your answer is $60.7 million, then input 61) Instruction: Type ONLY your numerical answer in the unit of million dollars, NO $ sign, NO comma sign, and round to the nearest integer. Year 0 1 1 2 FCF (unit: million) -250 100 110 120

Answer 1

cost of equity K_e = Risk free rate + Beta_equity * market risk premium

= 2% + 1.2* 5%

=8%

After tax cost of Debt K_e = {Risk free rate + Beta_debt * market risk premium }* (1-tax rate)

=(2% + 0.4*5% )* 0.7

= 2.8%

Equity value (Eq) = no.of shares * market value of each share = 5 million * $12 = $60 million

Debt Value (D) = Enterprise Value (E) - Equity value  (Eq) = $ 100 million - $ 60 million = $ 40 million

So, WACC = D/E * after tax cost of debt + Eq/E * cost of equity

= 40/100 * 2.8%  + 60/100 * 8%

= 5.92%

So, NPV = present value of all cah flows discounted at WACC

= -250 + 100/1.0592 + 110/1.0592² + 120/1.0592³

= $43.44 million

= 43 (input this value)