assignment+5+-+valuing+a+leveraged+firm.docx - FIN 3150 Fall 2018 Assignment 5 Valuing a leveraged firm Due You may do this assignment individually or

assignment+5+-+valuing+a+leveraged+firm.docx - FIN 3150...

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FIN 3150 Fall 2018 Assignment 5 – Valuing a leveraged firm Due: October 29, 2018 You may do this assignment individually or with one other person. A firm is planning to take a project that if funded entirely with equity has net after tax cash flows as indicated in the table below. Year Cash flow 0 -19000000 1 2000000 2 2000000 3 2000000 4 2000000 5 2000000 6 2000000 7 2000000 8 2000000 9 2000000 10 2000000 11 3000000 12 3000000 13 3000000 14 3000000 15 3000000 16 3000000 17 3000000 18 3000000 19 3000000 20 10000000 The firm estimates that the asset beta for comparable projects is 0.88. The risk free interest rate is 4.0% and the firm expects the market return over the next 20 years to average 12.0%. The project will operate as a corporation with a combined federal and state income tax rate of 25%. The firm plans to fund 20% of the project with debt that pays 4.0% interest annually for 20 years at which time the entire principal is due. For all of the following, use annual cash flows and annual interest payments. 1a. Using the capital asset pricing model, determine the required return of the project if
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