Jelly Inc. is considering an investment. It will produce FCF of $200 million at the end of
Question:
Jelly Inc. is considering an investment. It will produce FCF of $200 million at the end of each of the next 2 years (year 1 and year 2). This investment costs $50 million today. The project will end at end of year 2.
The new investment has the same risk as the firm. The firm faces a corporate tax rate of 35%. The firm expects to keep a debt-to-value ratio of 0.25 forever. Equity cost of capital is 15% and (before-tax) debt cost of capital is 8%.
a. find NPV using WACC method.
b. Find debt capacity of the project in each year- for years 0 to 2. Find NPV using APV method
c. Instead of a constant debt-to-value ratio, if the firm uses predetermined debt levels to finance this investment!
Initial debt 150M, and then reduces debt to $50 million after 1 year, then 0 after 2 years, What is NPV? Use unlevered value, from part b.
d. Why part (c) different NPV than (b)?
e. Instead of a constant D/V ratio, if the firm keeps its interest payment at 10% of free cash flow every year, NPV? (use VU( unlevered value from part b)
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt , Eugene F. Brigham