The Rex-Lint Inc. is planning to put a manufacturing facility in place to build widgets. The systematic risk of this project alone is 25% greater than they currently manage. The company has a target debt to value ratio of 35%. The beta of the assets currently managed is 0.8 and they face a 36% tax rate. The initial investment cost is $4,200,000 and the expected cash flows after tax are $1,200,000 per year for 6 years. The risk-free rate is a 5% and you believe the historical market risk premium of 8.5% is a reasonable estimate.
(a) What is the all equity value of the investment?
(b) What is the added value if the company finances this project with $682,044 worth of 16% debt which requires an interest payment until maturity when the full principle is due?
(c) If the Richardson's County Board of Commissioners approaches the Rex-Lint Inc. with an offer to raise the needed $682,044 debt capital as 15% perpetual debt, should the company accept the offer?