How does apv change if the firm incurs issue costs


Problem: Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.75 million per year for 10 years. The opportunity cost of capital is 12 percent, which reflects the project's business risk. Suppose the project is financed with $5 million of debt and $5 million of equity. The interest rate is 8 percent and the marginal tax rate is 35 percent. The debt will be paid off in equal annual installments over the project's 10-year life.

1) Calculate APV.

2) How does APV change if the firm incurs issue costs of $400,000 to raise the $5 million of required equity?

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Finance Basics: How does apv change if the firm incurs issue costs
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