The Also Horns Corp. is planning on introducing a new line of saxophones. They e
ID: 2656992 • Letter: T
Question
The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.
In addition to the information above, suppose the APV approach is used to evaluate the project for the next 4 questions. 3. How much is the unlevered cash flow?
$72,000
$84,000
$100,000
$120,000
$144,000 1 points QUESTION 77 1. What is the NPV of the project to an all-equity firm?
$-34,451
$-26,471
$-12,417
$25,376
$34,451 1 points QUESTION 78 1. What is the NPV of the financing side effects (NPVF)?
$44,334
$57,754
$62,250
$65,000
$75,250 1 points QUESTION 79 1. What is the APV of the project?
$12,341
$27,799
$31,283
$35,779
$45,337
The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.
In addition to the information above, suppose the APV approach is used to evaluate the project for the next 4 questions. 3. How much is the unlevered cash flow?
$72,000
$84,000
$100,000
$120,000
$144,000 1 points QUESTION 77 1. What is the NPV of the project to an all-equity firm?
$-34,451
$-26,471
$-12,417
$25,376
$34,451 1 points QUESTION 78 1. What is the NPV of the financing side effects (NPVF)?
$44,334
$57,754
$62,250
$65,000
$75,250 1 points QUESTION 79 1. What is the APV of the project?
$12,341
$27,799
$31,283
$35,779
$45,337
The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.
In addition to the information above, suppose the APV approach is used to evaluate the project for the next 4 questions. 3. How much is the unlevered cash flow?
$72,000
$84,000
$100,000
$120,000
$144,000 1 points QUESTION 77 1. What is the NPV of the project to an all-equity firm?
$-34,451
$-26,471
$-12,417
$25,376
$34,451 1 points QUESTION 78 1. What is the NPV of the financing side effects (NPVF)?
$44,334
$57,754
$62,250
$65,000
$75,250 1 points QUESTION 79 1. What is the APV of the project?
$12,341
$27,799
$31,283
$35,779
$45,337 In addition to the information above, suppose the APV approach is used to evaluate the project for the next 4 questions. 3. How much is the unlevered cash flow?
$72,000
$84,000
$100,000
$120,000
$144,000 1 points QUESTION 77 1. What is the NPV of the project to an all-equity firm?
$-34,451
$-26,471
$-12,417
$25,376
$34,451 1 points QUESTION 78 1. What is the NPV of the financing side effects (NPVF)?
$44,334
$57,754
$62,250
$65,000
$75,250 1 points QUESTION 79 1. What is the APV of the project?
$12,341
$27,799
$31,283
$35,779
$45,337
Explanation / Answer
3) Unlevered cash flow = 400000*(1-70%)*(1-40%) = $ 72,000 4) NPV = 72000/17%-450000 = $ -26,471 78) NPV of the financing side effects is the PV of the tax shield on interest on debt discounted at the after tax cost of debt: Annual tax shield on interest = 144385*9%*40% = $ 5,197.86 After tax cost of debt = 9*(1-40%) = 5.40% PV of the perpetual tax shield = 5197.86/9%= $ 57,754 79) APV = Unlevered NPV+NPV of financing side effects = -26471+57754 = $ 31,283
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