Your company is considering a project that will cost $1 million. The project wil

Question

Your company is considering a project that will cost $1 million. The project will generate after-tax cash flows of $250,000 per year for 7 years. The WACC is 15%, and the firm’s target D/E ratio is .6 The flotation cost for equity is 5%, and the flotation cost for debt is 3%. What is the NPV for the project after adjusting for flotation costs? –Weighted average flotation cost: –If we consider the flotation costs, CF0 is higher than $ 1 million CF 0 = –NPV =
Your company is considering a project that will cost $1 million. The project will generate after-tax cash flows of $250,000 per year for 7 years. The WACC is 15%, and the firm’s target D/E ratio is .6 The flotation cost for equity is 5%, and the flotation cost for debt is 3%. What is the NPV for the project after adjusting for flotation costs? –Weighted average flotation cost: –If we consider the flotation costs, CF0 is higher than $ 1 million CF 0 = –NPV =
Your company is considering a project that will cost $1 million. The project will generate after-tax cash flows of $250,000 per year for 7 years. The WACC is 15%, and the firm’s target D/E ratio is .6 The flotation cost for equity is 5%, and the flotation cost for debt is 3%. What is the NPV for the project after adjusting for flotation costs? –Weighted average flotation cost: –If we consider the flotation costs, CF0 is higher than $ 1 million CF 0 = –NPV =

Explanation / Answer

D/E ratio Floation Cost Flotation Cost Equity 0.625 5% 0.03125 Debt 0.375 3% 0.01125 Weight Average flotation Cost 0.0425 or 4.25% Note: Calculation D/E ratio Proportion Debt                   0.60 0.375 Equity                   1.00 0.625                   1.60 PMT           2,50,000 N                         7 Years r 15% Discount Factor 4.16042 PV         10,40,105 Note: Discount Factor 1/(1+.15)^n 1 0.86957 2 0.75614 3 0.65752 4 0.57175 5 0.49718 6 0.43233 7 0.37594 4.16042 NPV=1040105-1000000/(1-.0425)        (4,281.42) The project would have a positive NPV of 40,105 (1,040,105-1,000,000) without considering flotation cost. Once we consider the cost od issuing new securities tne NPV of it become negitive

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.