Construct pro forma and compute expected project cash flows

Assignment Help Financial Management

Reference no: EM131241297

Construct a pro forma for the following firm: A 4-year project costs $150 in year 1 (not year 0) and produces $70 in year 1, $60 in year 2, $50 in year 3, and $40 in year 4. (All numbers are year-end.) Depreciation, both real and financial, is straight line over 4 years. Projects of this riskiness (and with this term structure of project payoffs) have a 15% taxable cost of capital. The marginal corporate income tax rate is 33%.

(a) Assume that the firm is 100% equity- financed. Construct the pro forma and compute expected project cash flows.

(b) Compute the project IRR.

(c) Compute the project NPV. For the remaining questions, assume that the firm instead has a capital structure financing $100 with debt raised in year 1 at a 10% (expected) interest rate. Interest is paid out in each year. Principal and interest are paid out in the final year. Money in excess of interest payments is paid out as dividends.

(d) Construct the pro forma now. What is the IRR of this project?

(e) From the pro forma, what is the NPV of the debt-financed project?

(f) Compute the NPV via the APV method.

(g) Via the APV method, how much would firm value be if the firm would have taken on not $100, but $40, in debt (assuming the same interest rate of 10%)?

(h) Does the debt ratio of the firm stay constant over time? Is this firm a good candidate for the WACC method?

Reference no: EM131241297

Questions Cloud

What is value of project if factory is fully financed : Assume taxes in the economy do not exist. What is the value of this firm? - Using APV, what is the value of this project if the factory is fully financed with risk-free debt?

Discuss the worst-case response time to an emergency event : Why is it important that a field bus protocol provides a known constant transmission latency? Discuss the worst-case response time to an emergency event recorded in a field bus node in an event-triggered and in a time-triggered communication syste..

Vertical height of the hill : A bicyclist's average power output is 220 watts (W). If the bicyclist and rider with a combined mass of 75 kg climb a hill in 125 minutes, what is the vertical height of the hill?

What is the finest temporal resolution of the time of event : Assume that a single event is transmitted in a one-byte state message with a period of 50 msec. What is the finest temporal resolution of the time of event occurrence that can be encoded in this one-byte message?

Construct pro forma and compute expected project cash flows : Assume that the firm is 100% equity-financed. Construct the pro forma and compute expected project cash flows. - Compute the project IRR.

Explain challenge for us public company to fully adopt ifrs : Evaluate the challenges for u.s. public companies to fully adopt ifrs and propose solutions to these challenges. Provide support for your recommendations.

What are the key segments within this market : Discuss factors that affect your consumers' purchasing power and spending patterns. What is the economic environment that you are operating in? Is it a growth, recovery or recession? Will it be easy to find staff? What is the current interest rate..

Difference between time as data and time as control : Compare the advantages and disadvantages of connecting a sensor directly to a node of a distributed system versus the introduction of a field bus. Explain the difference between "time as data" and "time as control"?

Calculate the data efficiency of a ttp/a system : hat is the data efficiency of a functionally equivalent CAN system with a two byte data field (see Section 7.5.3)? Assume that the intermessage gap in the CAN system is 4 bitcells.

User Account

All Pages