Problem
UBT is about to open up a new branch. It will cost $35M today to set up, and will result in $9M in EBIT per year for the next 8 years, starting one year from today. UBT is going to borrow $20M of the startup costs for 8 years, at a rate of 3.2%. UMN, a firm with very similar operations, has a levered cost of equity of 15%, a debt-to-equity ratio of 2, and a cost of debt of 6%. The corporate tax rate is 25%.
i. What is UBT cost of unlevered equity?
ii. What is the present value of the tax shield from UBT's debt?
iii. What is the APV value of this project?