ABC Co has a target debt ratio of 40% and it keeps this target. The cost...

 

Transcribed Image Text:

ABC Co has a target debt ratio of 40% and it keeps this target. The cost of equity is 10% and the cost of debt is 4%. It is considering expanding its business and requires $1 million investment. After expansion, ABC expects additional free cash flows of $0.2 million per year in perpetuity. ABC decides to issue equity to finance this expansion. The equity issuance cost is 5%. The corporate tax rate is 30%. Assume that ABC will maintain the target debt ratio. What's the NPV of the expansion project? ABC Co has a target debt ratio of 40% and it keeps this target. The cost of equity is 10% and the cost of debt is 4%. It is considering expanding its business and requires $1 million investment. After expansion, ABC expects additional free cash flows of $0.2 million per year in perpetuity. ABC decides to issue equity to finance this expansion. The equity issuance cost is 5%. The corporate tax rate is 30%. Assume that ABC will maintain the target debt ratio. What's the NPV of the expansion project?

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the expansion project we need to follow these steps 1 Calc... View the full answer