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Calculate the net present value of the loan

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Reference no: EM132752281

Delta plc is considering a new project. For this project, Delta will incur the initial investment of 800,000, and will generate revenues of £300,000 and cash costs of 150,000 every year. Revenues and cash costs can be seen as perpetuity. Tax rate is 20% and the firm's all equity cost of capital is 15% per annum. The firm's cost of debt is 5% per annum. Delta uses £375,000 of debt to finance this project.

(a) Delta is also evaluating the use of a 4-year, 5% loan with proceeds of £375,000. The loan calls for equal annual principal payments. Calculate the net present value of the loan.

(b) Delta announced this morning that its profit from last quarter has dropped 20% compared to the previous quarter. The closing price of the company at the end of the day is up 10% from yesterday. Is this evidence against market efficiency?

Reference no: EM132752281

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