Life of the loan for tax purposes

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The String Corp is planning on introducing a new line of violas. They expect sales to be $5 million for the first five years, and $6 million per year from year six onwards (in perpetuity). Management estimates that total fixed and variable costs account for 65% of sales. The corporate tax rate is 25%. The discount rate on unlevered equity is 14.5%. Management is considering financing the initial investment of $3 million with internal equity.

(A) What would the unlevered NPV of this project be?

(B) The CFO has decided that the firm might prefer to finance $2 million of the initial investment with a bond issuance. The yield on a bond with the same credit risk as the firm is 8% and the firm would issue 10-year bonds with annual coupons. The firm would hire an investment bank that would charge $200,000 that would be paid immediately but be amortized over the life of the loan for tax purposes. What would be the APV of the project with the debt issuance?

Reference no: EM132811915

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