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Calculate the Project and Equity Free Cash Flows for the following scenario.

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Question;Calculate the Project and Equity Free Cash Flows for the following scenario. We want to finance a project with 30% debt (70% equity). We expect $1,000,000 in sales for next year, COGS to be 55% of sales, depreciation will be $400,000 and offset with $400,000 in new CAPEX. Assume that Year 1 is the first year of a perpetuity with no growth (you get the t1 cash flow for ever). The firm's cost of debt is 4% (assume the debt is perpetual and you never pay down any principal), the cost of equity is 12%, the tax rate is 35%. Hint: to determine the EFCF you will need to determine the value of the firm and the value of "D" so you can find the interest payment.Part II: If the firm in Problem 4 were to decide to use 50% debt, how would the Project Free Cash Flow be affected?

 

Paper#47550 | Written in 18-Jul-2015

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