Diversify with a new product line

Reference no: EM13152377

Your firm wants to diversify with a new product line. The project requires an initial investment of $8,000,000 and will provide $1,890,000 in unlevered after-tax cash flows at the end of each year for 10 years. Debt (bonds) of $4,000,000 will be issued (This will not change the firm's overall debt-equity ratio). Assume the 10-year debt was issued with a coupon rate equal to the debt yield rate (so the coupon = yield). Assume the firm's effective tax rate is 32.35%, risk-free rate is 3.26%, coupon is 4.50% and a 6% market premium to :

a) Find the value using APV (adjusted present value). You will need to estimate the unlevered cost of capital.

b) Find the value using FTE (flow to equity).

Reference no: EM13152377

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