Antonio's is analyzing a project with an initial cost of $45,000 and cash inflows of $30,000 a year for two years. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance their operations and maintains a debt-equity ratio of .40. The pre-tax cost of debt is 8 percent and the cost of equity is 12 percent. The tax rate is 34 percent. What is the projected net present value of this project (carry your D/V and E/V rations to at least three decimal points to get the correct answer). Please show steps and equations used.
Added by Bego-A K.
Step 1
Debt-equity ratio = 0.40 Debt = 0.40 * Equity Total value (V) = Debt + Equity Let's assume Equity = 1 (for simplicity) Then, Debt = 0.40 * 1 = 0.40 Total value (V) = 0.40 + 1 = 1.40 Weight of Debt (D/V) = Debt / Total value = 0.40 / 1.40 = 0.286 Weight of Show more…
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