Find the rival firm cost of unlevered equity

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Reference no: EM132769478

Suppose a firm is considering a $20 million project. The CFO has evaluated the project and determined that the project will produce an operating income of $4 million per year, in perpetuity.

The firm can raise the funds for the project's initial investment by issuing bonds or common stock. The firm's target debt-equity ratio is one-fourth, its pretax cost of debt is 6%, and it faces a corporate tax rate of 21%. The firm is fairly new and will need to estimate its cost of equity.
The only other firm in the market has a debt-value ratio of two-fifths, a beta of 1.2, and a pretax cost of debt of 10%. The risk-free rate of the capital market is 8% and the expected return to the market portfolio is 17%.

Problem 1: Find the rival firm's cost of unlevered equity and use it to estimate the NPV of the project under the WACC approach. Do not round intermediate steps. Enter the NPV rounded to the nearest cent.

Reference no: EM132769478

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