Eureka Space Technologies Problem

# Eureka Space Technologies Problem - Problem Eureka Space...

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Problem Eureka Space technology is currently an all equity firm: With 15 million outstanding shares Each share sells for \$32.50 Its Marginal tax rate is 35% With an initial investment of \$100M It will reduce annual costs by \$25M Can finance with either retained earnings (cost 12.5%) or new bond issue (cost 8%) The firm can fully utilize its tax shield

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Problem (cont.) a. Which financing method would you recommend and why? b. What is the resulting value of the firm from each of the two financing approaches? Using Retained Earnings All-equity; so r WACC = r S = 12.5% V Firm = initial V of firm + NPV (project) Initial V =15Mshares * \$32.50/share=\$487.5M Project costs \$100M, pre-tax annual benefit of \$25M NPV for perpetual project =[(\$25M)(1-0.35)/(.125)]- \$100M=\$30M V Firm = \$487.5M+ NPV of Project = \$487.5M + \$30M = \$517.5M
Problem (cont.) Using Debt: = initial V of firm (\$487.5M) + NPV of project (\$30MM)+ Debt issue (\$100MM) + Debt*T c

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Eureka Space Technologies Problem - Problem Eureka Space...

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