1. TerraCorp is about to open up a new branch in Lincoln. It will cost $35M today to set up, and will result in $9M in EBIT per year for the next 8 years, starting one year from today. TerraCorp is going to borrow $20M of the startup costs for 8 years, at a rate of 3.2%. EarthCo, a firm with very similar operations, has a levered cost of equity of 15%, a debt-to-equity ratio of 2, and a cost of debt of 6%. The corporate tax rate is 25%.
   1. What is TerraCorp's cost of unlevered equity?

1. What is the present value of the tax shield from TerraCorp's debt?

1. What is the APV value of this project?

Answer rating: 100% (QA)

To find TerraCorps cost of unlevered equity Ke we use the formula Ke EBIT 1 Tax rate Initial investm... View the full answer