Peroxi is a well-known manufacturer of bleach-based in the United States. They are considering a proposal...
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Peroxi is a well-known manufacturer of bleach-based in the United States. They are considering a proposal to manufacture their Pristine brand of high quality cleaners in the United Kingdom. One inducement to make the investment is subsidised financing in the form of a six-year loan of $20 million at 4% per annum. This loan would be repayable in six equal end-year payments. Additional information includes: Peroxi cost of equity Market cost of debt (unsubsidised) Optimal capital structure UK T-Bill rate Corporate tax rate, USA and UK (a) What discount rate should Peroxi use to evaluate the proposed project? 24% 10 % 40% debt, 60% equity 8% 34 % (33%) (b) Would you recommend that Peroxi undertake this investment? Explain fully. (33%) (c) What is the value of the subsidised loan? How would such a loan affect Peroxi's capital budgeting analysis? What (if any) are the controversial aspects? (33%) Peroxi is a well-known manufacturer of bleach-based in the United States. They are considering a proposal to manufacture their Pristine brand of high quality cleaners in the United Kingdom. One inducement to make the investment is subsidised financing in the form of a six-year loan of $20 million at 4% per annum. This loan would be repayable in six equal end-year payments. Additional information includes: Peroxi cost of equity Market cost of debt (unsubsidised) Optimal capital structure UK T-Bill rate Corporate tax rate, USA and UK (a) What discount rate should Peroxi use to evaluate the proposed project? 24% 10 % 40% debt, 60% equity 8% 34 % (33%) (b) Would you recommend that Peroxi undertake this investment? Explain fully. (33%) (c) What is the value of the subsidised loan? How would such a loan affect Peroxi's capital budgeting analysis? What (if any) are the controversial aspects? (33%)
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