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Acme is considering a new project that requires an investment of $100 million in machinery. This is expected to produce earnings before interest and taxes of $16 million per year for 4 years. The machinery will be fully depreciated to a zero-book value over 4 years using straight-line depreciation. Working capital costs are negligible. The tax rate is 25%. The unlevered cost of capital is 13%. They have a target debt ratio (debt/value) for the firm of 45%. Joker plans to use $40 million in bonds. The remaining funds will come from retained earnings. The bonds have a 4-year life, a coupon rate of 5% and a yield of 5%. Use free cash flows to equity to find the value of the project. You do NOT need to rebalance the debt (assume it is interest only debt for 4 years).
FCFE for year 0 =
FCFE for each year 1 to 3 =
FCFE for year 4 =
Value of the project =
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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