Macrosoft Corporation has an asset beta of 1.65, a tax rate of 40%, and can typically borrow at 6%. The riskless rate is 1.5% and the expected return on the S&P 500 is 12.9%. Macrosoft is considering investing in a project with an initial cost of $400,000 and a yearly EBIT of $120,000 for the next 8 years. Macrosoft will borrow $350,000 for 8 years to finance the project, at a subsidized interest rate of 5%.

1. What is Macrosoft unlevered cost of equity?
2. What is the NPV of this project if Macrosoft pays cash?
3. What is the NPV of the loan to Macrosoft ?
4. What is the overall NPV of this project?

Answer rating: 100% (QA)

GIVEN INFORMATION Expected return on the SP 500Rm 129 Asset beta 16... View the full answer