Find the value of the project

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Dora wants to diversify with a new product line. The project requires an initial investment of $8,000,000 and will provide $1,040,000 in after-tax unlevered cash flows at the end of each year forever. The unlevered beta is .625. The tax rate is 40%. The T-bill rate is 4% and the expected return on the market is 12%.

a. Find the value of the project if they use no debt.

b. Now suppose $5,714,285 in debt will be issued. The firm's target debt ratio (debt/value) is 40%. The debt has a beta of 0, the tax shields are as risky as the debt, and the debt is perpetual (since the project lasts indefinitely). Find the value of the project using APV (adjusted present value) and FTE (flow to equity).

Reference no: EM131160970

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