Calculate the base case all equity financed npv

Assignment Help Financial Management

Reference no: EM133015540

Question 1:

Mega Millions Inc is considering investing in a project with annual after-tax cash flows of $15 million per annum for five years. Initial investment cost is $20 million.

The debt capacity of the company will increase by $20 million over the life of the project, with issue costs of debt of $500,000. Interest rates are expected to remain at 8% for the duration of the project.

The existing cost of equity for the company is 15% and the current ratio of market value of debt:market value of equity is 1:3. Corporation tax is 30%.

Required:
Calculate the APV of the project and recommend whether Mega Millions should undertake the investment with the proposed method of financing.

Question 2:

A company operating in the insurance industry is considering whether to diversify by investing in a project in the transport industry.

The company has a gearing ratio of 30% debt and 70% equity, and its equity beta is 0.940. Its debt capital is risk-free.

The transport industry has an average equity beta of 1.362, and firms in the transport industry on average have a gearing ratio of 40% debt to 60% equity.

The risk-free rate of return is 5.3% and the expected market return is 8.3%.
The rate of taxation on profits is 23%.
The cash flows of the project after tax will be:
Year 0 $(600,000)
Years 1-3 $250,000

Required
Calculate the base case (all equity financed) NPV.

Reference no: EM133015540

Questions Cloud

Calculate the mean and the standard deviation of the scores : Write a Python script to calculate the cross-validation score for each feature selection strategy using an SVC classificatory and Calculate the mean

How to address them using behavioural economics : Improving internal organizational processes - How to address them using behavioural economics

West africa in the atlantic community : West Africa in the Atlantic Community: The Case of the Slave Coast Reflection Paper and What does the exchange of goods and services tell us about the Trans

Identify the regions europeans bought slaves : Identify the regions Europeans bought slaves from African traders - Below you have a blank map of Africa.

Calculate the base case all equity financed npv : Calculate the APV of the project and recommend whether Mega Millions should undertake the investment with the proposed method of financing

Determine the amount of overhead allocated to product : Determine the amount of overhead allocated to the mahogany product line and the walnut product line using activity-based costing

What amount should Omara report for the gain or loss : On June 30, 20X1, Omara Co. had outstanding 8%, $8,000,000 face amount, 15-year bonds. What amount should Omara report for the gain or loss

Determine the costs to be assigned to the units : There is no beginning Work in Process. Materials cost is $10 per unit and conversion costs are $11 per unit. Determine the costs to be assigned to the units

Prepare for Zaida Motor vehicle account : On the same day, he purchased two motor vehicles for RM25,000 each by cheque. Prepare for Zaida Motor vehicle account for 2019 and 2020

User Account

All Pages