Payout policy and capital structure for perpetual project

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Reference no: EM1336784

Consider another perpetual project like the crusher described in section 15-1. Its initial investment is $1,000,000, and the expected cash inflow is $95,000 a year in perpetuity. The opportunity cost of capital with all-equity financing is 10%, and the project allows the firm to borrow at 7%. The tax rate is 35%.

Use the APV to calculate this project's value.

a. Assume first that the project will be partly financed with $400,000 of debt and that the debt amount if it be fixed and perpetual.

b. Then assume that the initial borrowing will be increased or reduced in a proportion to changes in the market value of this project.

Reference no: EM1336784

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