Consider Avcos RFX project from Section 18.3. Suppose that Avco is receiving government loan guarantees that allow

Question:

Consider Avco’s RFX project from Section 18.3. Suppose that Avco is receiving government loan guarantees that allow it to borrow at the 6% rate. Without these guarantees, Avco would pay 6.5% on its debt.
a. What is Avco’s unlevered given its true debt of 6.5%?
b. What is the unlevered value of the RFX project in this case? What is the present value of the interest tax shield?
c. What is the NPV of the loan guarantees?
d. What is the levered value of the RFX project, including the interest tax shield and the NPV of the loan guarantees?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...