Purchase Solution

Cash flow to equity, project NPV

Not what you're looking for?

Ask Custom Question

Greta's Gaskets is considering investment in a new production facility. Initial investment would be $60 million, financed by $35 million of equity and $25 million of debt. The firm will maintain a constant leverage ratio over time. The expected return on levered equity for this project is 9.5%, while the expected return on debt is 6.5%. The project will generate pre-tax cash flows each year of $10 million, and the tax rate is 34%. The cash flow to equity each year is __________, and the project NPV is __________.

a.$4.98 million, $17.37 million
b.$5.53 million, -$1.82 million
c.$5.53 million, $23.18 million
d.$7.15 million, $37.59 million
e.$7.15 million, $40.29 million

Purchase this Solution
Solution Summary

This solution calculates cash flow to equity and project NPV.

Solution Preview

Answer: c. $5.53 million, $23.18 million

EBIT = $ 10 million
Interest = 6.5% x $ 25 million = $ 1.625 million
Therefore ...

Purchase this Solution
Free BrainMass Quizzes
Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Operations Management

This quiz tests a student's knowledge about Operations Management

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

View More Free Quizzes
Related BrainMass Solutions

  • Capital Budgeting and Constant Growth Stock

    We will use NPV (Net Present value method) to evaluate the projects Net Present Value To calculate the NPV (Net Present Value) we discount the cash flow at the given discount rates Project A Year Cash flow PV factor

  • Capital Budgeting Question for James Company

    First, you need to find the net present value or NPV of the project. We can find NPV by finding the present value of each cash flow, including both inflows and outflows, discounted at the project's cost of capital.

  • NPV

    216084 NPV Annual Cash Flow A project requires an initial outlay of $60,000 and is expected to yield an annual cash flow of E(X) = $10,000. The cash flow is a perpetuity.

  • Suppose Lucent Tech. has an equity cost of 10 %, market capi

    a) What is the free cash flow to equity for this project? b) What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method?

  • Net present value (CC Cushions Company)

    =WACC= 5.98% Next year's after tax cash flow= $1.32 million Since, the cash flow will continue to grow at 2.50% forever Present Value of cash inflows= Next year's cash flow/ (r-g) = $37.93 million =1.32 / (5.98% -

  • Value of Project

    The solution explains project evaluation using NPV, APV and free cash flow to equity methods.

  • Multiple Choice

    All answers and explanations in blue The solution explains various multiple choice questions relating to expected return, beta, cost of capital, cost of equity, cash flow and NPV

  • Weighted Average Cost of Capital (WACC), Adjusted Present Value

    The NPV calculated using the Free cash flow available to equity (flow-to-equity) method is £m -1997.088.

  • Net Present Value

    This gives the Cost of Equity as Cost of Equity = Risk Free Rate + ( Market Return-Risk Free Rate ) X beta Cost of Equity = 4%+(12%-4%)X1.4 Cost of Equity=15.2% To find the NPV of the project, discount the cash inflows by the cost of equity.

View More Related Solutions