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MLK, LLC., has sold shoes for over 112 years. The company currently has debt-equity ratio of 1.7 and a tax rate of 41%. The required return of the firm's levered equity is 19%. The company is planning an expansion in its production capacity. They will buy an equipment that it is expected to generate the following unlevered differential free cash flows: At Year 0, the initial investment would be -$9,600,000; at Year 1 the FCF would be $2,163,875; at Year 2 the FCF would be $4,173,584; at Year 3 the FCF would be $11,185,461. The company has arranged a debt issue of $5,040,000 to finance the expansion. Under the loan, the company would pay interest of 10% at the end of each year on the outstanding balance at the beginning of the year. If they take the debt, the company would also make year-end payments of one third of the debt, completely retiring the issue by the end of the third year.
Problem a. What would be the value of the project if they finance strictly with equity?
Problem b. What would be the value of the project if the company finances with the proposed debt and computes the APV?
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