Author: Anonymous

Monetta, Inc, has no debt, but is considering borrowing for…

Monetta, Inc, has no debt, but is considering borrowing for the first time to finance a three-year project. The company currently has an unlevered cost of capital of 13 percent and a 30 percent tax rate. The project requires an initial investment of $1.2 million, which will be straight-line depreciated over the three-year project life. The project, which is as risky as the firm’s current projects, is expected to generate earnings before depreciation of $600,000 per year for the three years. The capital for the initial investment will be raised with a loan for the full amount. The loan’s interest rate is 8 percent (which is also the current risk-free rate) and the principal will be repaid in one balloon payment at the end of the third year. What is the APV of the loan?

ABC Co. has a debt-equity ratio of 0.25, which will stay the…

ABC Co. has a debt-equity ratio of 0.25, which will stay the same forever. Their cost of debt is 5 percent per year, which means their annual interest payment is $1.00 million each year forever. The firm’s unlevered cost of capital is 10 percent and their tax rate is 20 percent. The firm’s assets will generate an annual EBIT of $12.00 million in perpetuity. Depreciation, agency costs, and bankruptcy costs are all zero in perpetuity. What is the value of the company’s equity? (Hint: use the Flow-to-Equity approach)