Monetta, Inc, has no debt, but is considering borrowing for the first time to finance a three-year project. The company currently has an unlevered cost of capital of 12 percent and a 30 percent tax rate. The project requires an initial investment of $2.1 million, which will be straight-line depreciated over the three-year project life. The project, which is as risky as the firm’s current projects, is expected to generate earnings before depreciation of $1,050,000 per year for the three years. The capital for the initial investment will be raised with a loan for the full amount. The loan’s interest rate is 9 percent (which is also the current risk-free rate) and the principal will be repaid in one balloon payment at the end of the third year. What is the APV of the loan?

The 10-year loan for a project we are evaluating requires $200,000 in flotation costs. These costs can be straight-line amortized over the life of the loan. If our cost of debt is 5 percent and our tax rate is 25 percent, what is the NPV of the flotation costs?

Southern Wind is an all-equity firm with 19,300 shares of stock outstanding and a total market value of $358,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $29,000 if the economy is normal, $16,400 if the economy is in a recession, and $41,600 if the economy booms. Ignore taxes. Management is considering issuing $89,800 of debt with an interest rate of 8 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy booms?

Monetta, Inc, has no debt, but is considering borrowing for the first time to finance a three-year project. The company currently has an unlevered cost of capital of 12 percent and a 30 percent tax rate. The project requires an initial investment of $1.2 million, which will be straight-line depreciated over the three-year project life. The project, which is as risky as the firm’s current projects, is expected to generate earnings before depreciation of $600,000 per year for the three years. The capital for the initial investment will be raised with a loan for the full amount. The loan’s interest rate is 9 percent (which is also the current risk-free rate) and the principal will be repaid in one balloon payment at the end of the third year. What is the APV of the loan?

The 10-year loan for a project we are evaluating requires $300,000 in flotation costs. These costs can be straight-line amortized over the life of the loan. If our cost of debt is 9 percent and our tax rate is 25 percent, what is the NPV of the flotation costs?

Cobalt Corp. has an unlevered value of $25 million and their debt has a market value $5 million. Their tax rate is 25 percent. Ignoring agency costs, what is value of the firm’s bankruptcy costs at this level of debt if the actual market value of the company is $23.625 million? (Hint: start with the M&M Propositions)

The 10-year loan for a project we are evaluating requires $275,000 in flotation costs. These costs can be straight-line amortized over the life of the loan. If our cost of debt is 7 percent and our tax rate is 25 percent, what is the NPV of the flotation costs?

Monetta, Inc, has no debt, but is considering borrowing for the first time to finance a three-year project. The company currently has an unlevered cost of capital of 17 percent and  a 30 percent tax rate. The project requires an initial investment of $2.1 million, which will be straight-line depreciated over the three-year project life. The project, which is as risky as the firm’s current projects, is expected to generate earnings before depreciation of $1,050,000 per year for the three years. The capital for the initial investment will be raised with a loan for the full amount. The loan’s interest rate is 5 percent (which is also the current risk-free rate) and the principal will be repaid in one balloon payment at the end of the third year. What is the APV of the loan?

The 10-year loan for a project we are evaluating requires $275,000 in flotation costs. These costs can be straight-line amortized over the life of the loan. If our cost of debt is 8 percent and our tax rate is 25 percent, what is the NPV of the flotation costs?

Janice purchased 200 shares of a company whose capital structure is 40 percent debt. The company announced that it will sell new shares of stock to pay off all of its debt (that is, become unlevered). The value of the shares is $60 per share before and after the restructuring. How can Janice use homemade leverage to replicate the company’s old capital structure? Ignore taxes in your analysis.