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hw3 answers - UNIVERSITY OF SOUTHERN CALIFORNIA Marshall...

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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 unlevered Cost of Equity is 22.0 % for this project, what is the Net Present Value? What is the current beta of the firm’s equity, assuming that R f is 6.0%, and the market risk premium, ERP m , is 8.0%. Year 1 2 3 Free Cash Flow 2,772.00 3,102.00 3,036.00 Interest Tax Shield 340.00 400.00 410.00 Answer: Below are the discounted cash flows: PV of the Cash Flows Year 1 2 3 Free Cash Flow 2,272.13 2,084.12 1,671.95 Interest Tax Shield 306.31 324.65 299.79 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 infer the current equity beta by first calculating the levered CoE , CoE ( L ), and then reversing the CAPM equation. Reverse the CoE ( u ) equation to get: ( ) ( ) ( ) [ ] ( ) E D CoD u CoE u CoE L CoE c τ + = 1 .
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