Bickler Enterprise is currently an all-equity company. The company is considering a project with $600,0000 cash...

 

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Bickler Enterprise is currently an all-equity company. The company is considering a project with $600,0000 cash inflows per year for the indefinite future. The company expects the cash costs to be 80% of sales and the initial investment for this project is $400,000. The tax would be 34% and the cost of equity is 25%. The company is also considering financing the project with exactly $270,000 in perpetual debt. Required: a) If the project is financed with only equity, would the project be accepted or rejected? [10 marks] b) If the company finances the project with debt, under APV approach, would the project be accepted or rejected? [5 marks] c) If the company finances the project with debt, assuming the interest rate is 15%, under FTE approach, would the project be accepted or rejected? [5 marks] d) Discuss why practitioner seem to agree that the APV approach is less important method of capital budgeting? [5 marks] Bickler Enterprise is currently an all-equity company. The company is considering a project with $600,0000 cash inflows per year for the indefinite future. The company expects the cash costs to be 80% of sales and the initial investment for this project is $400,000. The tax would be 34% and the cost of equity is 25%. The company is also considering financing the project with exactly $270,000 in perpetual debt. Required: a) If the project is financed with only equity, would the project be accepted or rejected? [10 marks] b) If the company finances the project with debt, under APV approach, would the project be accepted or rejected? [5 marks] c) If the company finances the project with debt, assuming the interest rate is 15%, under FTE approach, would the project be accepted or rejected? [5 marks] d) Discuss why practitioner seem to agree that the APV approach is less important method of capital budgeting? [5 marks]

Answer rating: 100% (QA)

a The project would be accepted if it is financed with only equity This is because the net present v... View the full answer