Propel Corporation plans to make a $50 million investment, initially funded completely with debt. The free cash

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Propel Corporation plans to make a $50 million investment, initially funded completely with debt. The free cash flows of the investment and Propel€™s incremental debt from the project follow:

Propel Corporation plans to make a $50 million investment, initially

Propel€™s incremental debt for the project will be paid off according to the predetermined schedule shown. Propel€™s debt cost of capital is 8%, and its tax rate is 40%. Propel also estimates an unlevered cost of capital for the project of 12%.
a. Use the APV method to determine the levered value of the project at each date and its initial NPV.
b. Calculate the WACC for this project at each date. How does the WACC change over time? Why?
c. Compute the project€™s NPV using the WACC method.
d. Compute the equity cost of capital for this project at each date. How does the equity cost of capital change over time? Why?
e. Compute the project€™s equity value using the FTE method. How does the initial equity value compare with the NPV calculated in parts a andc?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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...
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Corporate Finance

ISBN: 978-0133097894

3rd edition

Authors: Jonathan Berk and Peter DeMarzo

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