Question

Problem 18-14 Beta and Leverage Fitzgerald Industries has a new project available that requires an initial investment of $5.2 million. The project will provide unlevered cash flows of $848,000 per year for the next 20 years. The company will finance the project with a debt-value ratio of .25. The company's bonds have a YTM of 6.9 percent. The companies with operations comparable to this project have unlevered betas of 1.11, 1.04, 1.26, and 1.21. The risk-free rate is 4.3 percent and the market risk premium is 6.5 percent. The tax rate is 23 percent. What is the NPV of this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) NPV

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC EWrap Text Calibri 11 General ECopy Fill в IU- Merge & Center Insert Delete Format Paste +.0 .00 Conditional Format Cell Sort & Find & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells fox N934 L N O Q T U V 934 935 936 937 unlevered beta = (1.11 1.04 +1.26 1.21)/4 938 STEP 1 939 unlevered beta = 1.1550 940 941 STEP 2 releveraging beta 942 levered beta unlevered beta * (1+ (D/E)(1-t)) levered beta 1.1550* (1+ (25/75) (1-0.23) 943 944 levered beta = 1.4515 945 beta 946 1.4515 6.50% 947 RISK PREMIUM risk free rate 4.30% 948 949 Ke Rfbeta (Rm-Rf) 950 Ke 4.3%1.4515* (6.5%)= 13.7344% [FULL VALUE OF BETA TAKEN] 951 STEP 3 [NO INTERMEDIATE ROUNDING IS DONE] 952 before tax 953 STEP 4 kd 6.90% 954 BETA LEVERED MI-np-ir REPLACEMENT S NPVRELEVANT REPLACEMENT STEIN indiffEPS EBIT MAC МАФП 4 HPR GMAM EAC MACRS BOND OPTION TO WAIT LEASE SLM GOLF IRR Rea erences 120% WA 00:21 TENG 30-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC EWrap Text Calibri 11 General Copy Fill Merge & Center Insert Delete Format Paste в IU* +.0 .00 Conditional Format Cell Sort & Find & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells fox L972 M N O Q T U V kd before tax 6.90% 953 STEP 4 954 955 WACC=We*ke + Wd*kd(1-t) (75/100)*13.7344%+(25/100)* (6.9%)* (1-0.23) 956 WACC= 11.6291% 957 STEP 5 958 959 NPV PV OF UNLEVERED CASH FLOWS - INVESTMENT NOTE NPV = (848000 X PVIFA @11.6291%, 20 YEARS) 5200000 PVIFA @11.6291% FOR 20 YEARS 960 EXCEL 961 (848000 X 7.6465442) - 5200000 NPV = 7.6465442 1284269.51 NO INTERMEDIATE ROUNDING IS DONE] 962 ANSWER NPV = 963 964 965 966 967 968 969 970 971 972 973 BETA LEVERED STEIN indiffEPS EBIT MAC EAC МАCRS NPV RELEVANT МАФП 4 MI-np-ir REPLACEMENTS HPR GMAM REPLACEMENT BOND OPTION TO WAIT LEASE SLM GOLF IRR Rea erences 120% WA 00:22 TENG 30-11-2019