Dave - O Corp is looking to build a new factory in Florid. The initial investment is
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DaveO Corp is looking to build a new factory in Florid. The initial investment is $ million. The equipment will be fully depreciated using the straightline method over its economic life of years. EBIT collected from the factory are projected to be $ million per year for years. The corporate tax rate is percent. The required rate of return for the project under allequity financing is
This project could be partially, privately financed by taking out a $ million loan over a year period. The private, pretax cost of debt is Flotation costs would equal of the loan total.
Alternatively, to encourage investment in the state, the Florida state government could subsidize the project by allowing offering the loan to DaveO with a rate and zero flotation costs.
For either loan, all principal will be repaid in one balloon payment at the end of Year
a What is the NPV of the all equity project? Explain whether you would proceed with the project if it was an allequity project.
b What is the NPV of the financing ignoring flotation costs
c What is the NPV of the financing accounting for flotation costs?
d What is the value of this project using the private debt financing with equity? Explain why you would or wouldnt pursue the project using this private debt financing.
e What is the NPV of the subsidized financing?
f What is the value APV of this project with the subsidized loan? Explain whether you would pursue the project with the subsidized loan.
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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