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Question: A company is considering a new investment project. The project will cost $80 million and will generate after-tax operating cash flows of $10 million per year forever. The company feels that the project can support 50% of its value in new debt. This debt could be issued at an 8% yield. The corporate tax rate is 35% (assume that personal tax effects are irrelevant). Given this financing assumption, the company feels that an appropriate cost of equity for the project is 14.8%

a) Given the company's financing assumption, what is the NPV of the project?

b) What is Ro, the project's cost of capital if it were entirely equity-financed?

c) Suppose the company had a covenant in one of its already outstanding debt agreements, restricting it from issuing any more than $20 million in additional debt. By how much would such a restriction reduce the NPV of the company's new project?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92795657

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