1. Propel Corporation plans to make an investment, initially funded completely with debt. The investment requires...

 

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1. Propel Corporation plans to make an investment, initially funded completely with debt. The investment requires an initial upfront cost of $49.8 million. The free cash flows of the investment and Propel's incremental debt from the project follow: Year Free Cash Flows ($ millions) Debt ($ millions) 0 1 2 3 40.2 18.3 23.6 49.8 29.7 13.3 0.00 Propel's incremental debt for the project will be paid off according to the schedule shown. Propel's debt cost of capital is 8.8%, and its tax rate is 38%. Propel also estimates an unlevered cost of capital for the project of 11.8%. (a) Use the APV method to determine the levered value of the project at each date and its initial NPV. (b) Compute the equity cost of capital for this project at each date. How does the equity cost of capital change over time? Why? 1. Propel Corporation plans to make an investment, initially funded completely with debt. The investment requires an initial upfront cost of $49.8 million. The free cash flows of the investment and Propel's incremental debt from the project follow: Year Free Cash Flows ($ millions) Debt ($ millions) 0 1 2 3 40.2 18.3 23.6 49.8 29.7 13.3 0.00 Propel's incremental debt for the project will be paid off according to the schedule shown. Propel's debt cost of capital is 8.8%, and its tax rate is 38%. Propel also estimates an unlevered cost of capital for the project of 11.8%. (a) Use the APV method to determine the levered value of the project at each date and its initial NPV. (b) Compute the equity cost of capital for this project at each date. How does the equity cost of capital change over time? Why?

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Answers a Levered Value of the Project The levered value of the project is calculated by discounting ... View the full answer