Assignment4 - Assignment 4 Corporate Finance II (ACTSC372)...

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Assignment 4 Corporate Finance II (ACTSC372) Due date: April 7, 5:00pm. Outside MC 6016 1. Honda and GM are competing to sell a fleet of SUVs to Hertz. The vehicles will be in an asset class with a CCA rate of 25 percent and will be sold after five years. Hertz expects that the SUVs will have no salvage value. The car rental company expects a fleet of 25 vehicles to generate $300,000 per year in pretax income. Hertz is in the 40 percent tax bracket and the firm’s overall required return is 10 percent. The addition of the new fleet will not add to the risk of the firm. Treasury bills are priced to yield 6 percent. (a). What is the maximum price that Hertz should be willing to pay for the fleet of SUVs? ( Hint: The maximum price that that Hertz should be willing to pay for the fleet of cars will all-equity funding is the price that makes the NPV of the transaction equal to zero ). (b). Suppose the price of the fleet (in Canadian dollars) is $975,000; both suppliers are charging this project. Hertz is able to issue $600,000 in debt to finance the project. The bonds can be issued at par and will carry an 8 percent interest rate. Hertz will incur no costs to issue the debt and no costs of financial distress. What is the APV of this project if Hertz uses debt to finance the auto purchase? (c) . To entice Hertz to buy the SUVs from Honda, the Japanese government is willing to lend Hertz $600,000 at 5 percent. Now what is the maximum price that Hertz is willing to pay Honda Canada for the fleet of SUVs? 2. Traid Corporation has established a joint venture with Tobacco Road Constructing, Inc., to build a toll road in Southern Ontario. The initial investment in paving equipment is $20 million. The asset qualifies for
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Assignment4 - Assignment 4 Corporate Finance II (ACTSC372)...

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