Annual after-tax cash flow to equity holders

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Company B is starting a new project with a life of 5 years. The company needs to acquire new fixed assets for 12,450,000 in order to start the project. These assets will be depreciated straight-line through the life of the project. The CFO of the company has chosen to raise 1/3 of the necessary funds for the new project as debt and 2/3 as equity. Moreover the debt level for the project will be kept constant through its life, and it bears no systematic risk (beta of debt is 0). The corporate tax rate is 24%. The cost of debt is 4.35%. The expected return of the market portfolio is 9%. The project's levered rate of return is 9.35% and the unlevered rate of return is 7.69%.

The assets of company B's project produce a constant expected EBITDA of $4,560,000 per year for the next 5 years, and the depreciation tax shield has a risk profile comparable to the risk of the company's debt.

What is the annual after-tax cash flow to equity holders from the new project at the end of each of the five years of its life?

Reference no: EM133071982

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