uuestion 7 (of Dorman Industries has a new project available that requires an in

Question

uuestion 7 (of Dorman Industries has a new project available that requires an initial investment of $6 will provide unlevered cash flows of $855,000 per year for the next 20 years. The company will finance the project with a debt-to-value ratio of 4. The company's bonds have a YTM of with operations comparable to this project have unlevered betas of 1.33, 1.26, 1.48, and 1.43. The risk-free rate is 3.4 percent, and the market risk premium is 6.6 percent The company has a tax rate of 35 percent. .3 milion. The project 6.4 percent. The companies What is the NPV of this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) NPV eBook & Resources eBook: 18 7 Beta and Leverage

Explanation / Answer

Average Unlevered equity beta = (1.33 + 1.26 + 1.48 + 1.43) / 4 = 1.375

D / V = 0.4

D/E = 0.4 / (1-0.4) = 2/3 = 0.67

levered equity beta = [1 + (1-tax rate)Debt/Equity) * Beta unlevered

levered equity beta = (1+(1-35%)*0.67)*1.375 = 1.974

Cost of equity = 3.4% + 1.974*6.6% = 16.43%

WACC = 0.4*6.4%*(1-35%) + 0.6*16.43% = 11.52%

Debt value = 0.4*6.3 = 2.52

Interest = 6.4%*2.52*10^6 = 161280

Cashflow = (855000 - 161280)*(1-35%) = 450918

NPV = -6300000 + 450918*(1 - (1+11.52%)-20 ) / 11.52% = -2828017.94

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