THANK YOU! MVP, Inc., has produced rodeo supplies for over 20 years. The company
ID: 2648896 • Letter: T
Question
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MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 40 percent and is in the 35 percent tax bracket. The required return on the firm's levered equity is 15 percent. MVP is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: The company has arranged a $9.69 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 8 percent at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $3,230,000 per year. completely retiring the issue by the end of the third year. Calculate the APV of the project. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) APV $Explanation / Answer
SOLUTION:
The adjusted present value of a project equals the net present value of the project under all-equity financing plus the net present value of any financing side effects.
According to Modigliani-Miller Proposition II with corporate taxes:
rS = r0 + (B/S)(r0
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