Problem: A project's after-tax operating cash inflows are $175,000 per year for each of the next four years. The initial investment is $500,000. The unlevered cost of equity capital is 15%. The risk-free interest rate is 7%
Q1. What is the base-case NPV?
Q2. If the project is financed entirely with stock issues, the flotation costs are equal to 6% of the gross proceeds. What is the project's adjusted present value (APV)?
Q3. Assume that the project is financed entirely with debt issues. The interest rate is 11% and the firm is in a 30% tax bracket. While the firm only has to make annual interest payments, the loan will be paid back in total when the project ends. What is the APV?
Q4. If the project is financed entirely with a special loan, the subsidized rate will only be 4% although the fair market rate is 10%. Under this loan, the firm makes annual year-end interest payments, repaying the principal at the end of four years. How much are the savings associated with this subsidy?