WACC is the Weighted Average Cost Of Capital
APV is Adjusted Present Value
Solutions given by professor
a) r* = .1057
b) APV = 73.9986
c) APV = 73.9986 , r = .1158
What are the steps by steps solution to this problem?
Problem 7.3. The Fulsome Gas Co. is evaluating a new energy project.
An investment of $112.4 million is required, and the project is forecasted to generate future cash flows of $19.7 million per year in perpetuity. Fulsome has a current market value of $2.65 billion.
It maintains a target debt ratio of 25%, and the returns on its debt and equity are estimated to be 5.5% and 12.9%, respectively. Fulsome faces a tax rate of 35%. Ignore brokerage costs.
a. Calculate the WACC for Fulsome.
b. Calculate the APV of the project using method. Calculate the APV of the project using the conventional method.