Use the information below to solve the following questions about Arthur Co., which is about to...
Use the information below to solve the following questions about Arthur Co., which is about to undergo an 8-year project:
|
Unlevered Cost of Equity |
10.0% |
|
Cost of Debt |
6.5% |
|
% debt financing |
60% |
|
Tax Rate |
35% |
|
Target D/E |
1.5 |
|
Year |
After-tax cash flows for all equity firm |
|
0 |
$(12,000,000) |
|
1-7 |
$2,000,000 |
|
8 |
$3,000,000 |
What is the NPV (all equity) of this project?
What is the NPV of the project using the FTE method?
What is the NPV of the project using the WACC?
What is the APV of this project?
Homework Answers
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |
| Cash Flow of All Equity Firm | -1,20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 30,00,000 | |
| 1 | ||||||||||
| NPV using All Equity | ||||||||||
| Cost of Equity | 10.00% | |||||||||
| Discount factor | 1 | 0.909090909 | 0.826446281 | 0.751314801 | 0.683013455 | 0.620921323 | 0.56447393 | 0.513158118 | 0.46650738 | |
| Present Value | -1,20,00,000 | 18,18,182 | 16,52,893 | 15,02,630 | 13,66,027 | 12,41,843 | 11,28,948 | 10,26,316 | 13,99,522 | |
| NPV | -8,63,640 |
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |
| Cash Flow of All Equity Firm | -1,20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 30,00,000 | |
| WACC | 6.54% | |||||||||
| Discount factor | 1.00 | 0.94 | 0.88 | 0.83 | 0.78 | 0.73 | 0.68 | 0.642 | 0.60 | |
| PV | -1,20,00,000 | 18,77,317 | 17,62,160 | 16,54,067 | 15,52,604 | 14,57,365 | 13,67,969 | 12,84,056 | 18,07,935 | |
| NPV | 7,63,473 |
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | ||
| APV | -1,20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 30,00,000 | |
| V | 1,27,63,473 | 1,08,86,156 | 91,23,995 | 74,69,929 | 59,17,324 | 44,59,959 | 30,91,990 | 18,07,935 | - | |
| Debt(Using D/E ratio on Value using WACC) | 76,58,084 | 65,31,693 | 54,74,397 | 44,81,957 | 35,50,395 | 26,75,975 | 18,55,194 | 10,84,761 | - | |
| Interest Payment | 4,97,775 | 4,24,560 | 3,55,836 | 2,91,327 | 2,30,776 | 1,73,938 | 1,20,588 | 70,509 | ||
| Interest Tax Shield | 1,74,221 | 1,48,596 | 1,24,543 | 1,01,965 | 80,771 | 60,878 | 42,206 | 24,678 | ||
| Unlevered WACC | 7.90% | |||||||||
| Unlevered VAlue | -1,20,00,000 | 18,53,568 | 17,17,857 | 15,92,083 | 14,75,517 | 13,67,486 | 12,67,364 | 11,74,573 | 16,32,863 | |
| 1,20,81,310 | ||||||||||
| NPV | 8,39,169 |
| FTE | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |
| -1,20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 30,00,000 | ||
| V | 1,27,63,473 | 1,08,86,156 | 91,23,995 | 74,69,929 | 59,17,324 | 44,59,959 | 30,91,990 | 18,07,935 | 0 | |
| Debt(Using D/E ratio on Value using WACC) | 76,58,084 | 65,31,693 | 54,74,397 | 44,81,957 | 35,50,395 | 26,75,975 | 18,55,194 | 10,84,761 | 0 | |
| Interest Payment | 0 | 4,97,775 | 4,24,560 | 3,55,836 | 2,91,327 | 2,30,776 | 1,73,938 | 1,20,588 | 70,509 | |
| Interest Tax Shield | 0 | 1,74,221 | 1,48,596 | 1,24,543 | 1,01,965 | 80,771 | 60,878 | 42,206 | 24,678 | |
| Net borrowing | 76,58,084 | -11,26,390 | -10,57,296 | -9,92,440 | -9,31,563 | -8,74,419 | -8,20,781 | -7,70,433 | -10,84,761 | |
| FCFE | -43,41,916 | 6,99,388 | 7,94,108 | 8,83,017 | 9,66,473 | 10,44,809 | 11,18,340 | 11,87,361 | 18,90,561 | |
| Cost of Equity | 10.00% | |||||||||
| Discount factor | 1.00 | 0.91 | 0.83 | 0.75 | 0.68 | 0.62 | 0.56 | 0.51 | 0.47 | |
| PV | -43,41,916 | 6,35,807 | 6,56,288 | 6,63,424 | 6,60,114 | 6,48,744 | 6,31,274 | 6,09,304 | 8,81,961 | |
| NPV | 10,45,000 |
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