UNIVERSITY OF SOUTHERN CALIFORNIA Marshall School of Business INTERNATIONAL FINANCIAL MANAGEMENT FBE 436 Aris Protopapadakis ANSWERS TO PROBLEM SET # 3: Problem #3.1:Below is the relevant cash flow report for a project. If the corporate tax rate is 34%, the Debt/Equity ratio is 1.00, the Cost of Debt is 11.0%and the unleveredCost of Equity is 22.0% for this project, what is the Net Present Value? What is the current betaof the firm’s equity, assuming that Rfis 6.0%,and the market risk premium, ERPm, is 8.0%.Year 1 2 3 Free Cash Flow 2,772.003,102.003,036.00 Interest Tax Shield 340.00400.00410.00 Answer: Below are the discounted cash flows: PV of the Cash Flows Year 1 2 3 Free Cash Flow 2,272.132,084.121,671.95 Interest Tax Shield 306.31324.65299.79 Total Present Value: $6,958.94 Free Cash Flow is discounted at 22% --CoE(u)-- and the interest tax shields are discounted at 11% --CoD. We can inferthe current equity beta by first calculating the leveredCoE, CoE(L), and then reversing the CAPM equation. Reverse the CoE(u) equation to get: ( )( )( )()EDCoDuCoEuCoELCoEcτ−−+=1.
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