Reference no: EM132980434

Questions -

Q1. 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.

a. What would be the value of the project if they finance strictly with equity?

b. What would be the value of the project if the company finances with the proposed debt and computes the APV?

Q2. Company X has an investment opportunity in Europe. The project costs € 42,000,000 and is expected to produce cash flows of €26,000,000 in Year 1, €23,000,000 in Year 2, and€ 13,000,000in Year 3. The current spot exchange rate is $2.75 /€ and the current risk-free rate in the United States is 4%, compared to that in Europe of 10.5%. The appropriate discount rate for the project is estimated to be 11%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated€ 13,750,000. What is the NPV of the project? Use the Home Currency approach to determine the NPV.