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Investment Management

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(The following information relates to Questions 28 to 31)

A project's after-tax operating cash inflows are $175,000 per year for each of the next four years. The initial investment is $500,000. The unlevered cost of equity capital is 15%. The risk-free interest rate is 7%

28. What is the base-case NPV?
A) $750
B) -$375
C) $1,098
D) -$653

29. If the project is financed entirely with stock issues, the flotation costs are equal to 6% of the gross proceeds. What is the project's adjusted present value (APV)?
A) $31,540
B) -$32,290
C) -$26,695
D) $616

30. Assume that the project is financed entirely with debt issues. The interest rate is 11% and the firm is in a 30% tax bracket. While the firm only has to make annual interest payments, the loan will be paid back in total when the project ends. What is the APV?
A) $55,000
B) $26,315
C) $46,733
D) -$62,810

31. If the project is financed entirely with a special loan, the subsidized rate will only be 4% although the fair market rate is 10%. Under this loan, the firm makes annual year-end interest payments, repaying the principal at the end of four years. How much are the savings associated with this subsidy?
A) $95,100
B) $34,150
C) $63,400
D) $75,000

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Solution Preview

Please see the attached file.

ANSWER 28
Base case NPV = 175000 PVIFA (15%, 4) -500000
= -$ 378.79
i.e. $ 375 ...

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