The Family Business 1. STAGE 1 . A new family business raises $20,000 in debt an
ID: 2708940 • Letter: T
Question
The Family Business
1. STAGE 1. A new family business raises $20,000 in debt and $30,000 in equity. Their cost of borrowing is 9%, while stockholders will be satisfied with a return of 15%. The company expects to face a marginal tax rate of 35%.
QUESTIONS
1) Estimate an appropriate discount rate for new projects.
2) Prior to investing in any projects, what is the value of the firms assets?
2. STAGE 2. The company must choose between two mutually exclusive projects, A and B, with the following projected cashflows. Investments in plant and equipment (P&E) are depreciable on a straightline basis for tax purposes (salvage value = 0). Cashflow from operations excludes depreciation charges and is stated after-tax.
Project TIME 0 TIME 1 TIME 2 TIME 3 TIME 4
A P&E (invest) -30,000
WC (invest) -20,000 20,000
CF from ops 10,000 10,000 10,000 10,000
B P&E (invest) -20,000
WC (invest) -30,000 30,000
CF from ops 9,000 9,000 9,000 9,000
QUESTIONS
3) Which project should the company undertake?
4) What is the NPV of this project?
5) Estimate the value of the firm’s assets, once the project is initiated.
Explanation / Answer
Answer:1
=9%(1-0.35)*20000/50000+15%*30000/50000
=2.34%+9%=11.34%
Answer:2 value of firm=$50000
Answer:4 NPV
Project A:
Project B:
Answer:3 Both the project has negative npv. so none of the project is taken.
Project B should be taken because it has less negative NPV as compare to project A.
Particulars 0 1 2 3 4 P&E invest -30000 WC Invest -20000 20000 Cash flow 10000 10000 10000 10000 Total cash flow -50000 10000 10000 10000 30000 P.V.F (11.34%) 1 0.898 0.80667 0.7245 0.65072 PV ($) -50000 8980 8066.7 7245 19521.6 NPV -6186.7Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.