Question

Vargo's has a target debt-to-value ratio of .6. The pretax cost of debt is 8.4 percent, the tax rate is 21 percent, and the unlevered cost of equity 13.2 percent. A project the firm is considering has a cash flow to the levered equityholders of $48,700 and an initial unborrowed cost of $216,000. What is the NPV of the project? A) $41,836 B) $48,208 C) $62,342 D) $61,003 E) $38,367

Answer 1

Answer:

Option(A) is the correct answer to the given question .

Explanation:

As mention in the given question following are the points

The cost of unlevered equity = R1 = 13.2%,

The cost pretex of the Debt = Rd1 = 8.4 % of the tax Rate is 21 % and  Ratio of the target Debt= 0.6

Target of the Debt-to the-Equity Ratio cab be determined

= DE1 = 0.6 /  ( 1- 0.6 )

= 3/2

The cost of the levered Equity

= Re1 = R1+ (1-Tax Rate) x DE1 x (R1-Rd1)

= 13.2 + (1-0.21) x (3/2) x (13.2-8.4)

= 18.888 %

So levered the Equity Cash Flow

= $ 48700 also the

Initial unborrowed cost = $ 216000  

Therefore NPV of the project

= (48700 / Re1) - 216000

= (48700 / 0.18888) - 216000

= $ 41835.663

=~ $ 41836