Harris Inc. is a book publisher that is considering developing an e-reader. The project requires 270 ($ thousand) in capital expenditures upfront. The production will continue for two years, and the FCFs in years 1 and 2 are 150 and 170 (in $ thousand). The tax rate is 50%. The asset cost of capital for the book publishing industry is 8%. Harris’s cost of debt is 6%. Turbo Inc. is a public firm that sells e-readers. It has a debt-to-value ratio 1/2. Its equity cost of capital is 22% and its debt cost of capital is 4%. (a) What is the NPV of the project if it is entirely financed with equity (in $ thousand)?(Round to two decimal places.) (b) What is the NPV of the project if Harris maintains a fixed D/E ratio of 1/1 and finances the project with this D/E ratio (in $ thousand)?(Round to two decimal places.)
Harris Inc. is a book publisher that is considering developing an e-reader. The project requires 270 ($ thousand) in capital expenditures upfront. The production will continue for two years, and the FCFs in years 1 and 2 are 150 and 170 (in $ thousand). The tax rate is 50%. The asset cost of capital for the book publishing industry is 8%. Harris’s cost of debt is 6%. Turbo Inc. is a public firm that sells e-readers. It has a debt-to-value ratio 1/2. Its equity cost of capital is 22% and its debt cost of capital is 4%. (a) What is the NPV of the project if it is entirely financed with equity (in $ thousand)?(Round to two decimal places.) (b) What is the NPV of the project if Harris maintains a fixed D/E ratio of 1/1 and finances the project with this D/E ratio (in $ thousand)?(Round to two decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Harris Inc. is a book publisher that is considering developing an e-reader. The project requires 270 ($ thousand) in capital expenditures upfront. The production will continue for two years, and the FCFs in years 1 and 2 are 150 and 170 (in $ thousand). The tax rate is 50%. The asset cost of capital for the book publishing industry is 8%. Harris’s cost of debt is 6%.
Turbo Inc. is a public firm that sells e-readers. It has a debt-to-value ratio 1/2. Its equity cost of capital is 22% and its debt cost of capital is 4%.
(a) What is the NPV of the project if it is entirely financed with equity (in $ thousand)?
(Round to two decimal places.)
(Round to two decimal places.)
(b) What is the NPV of the project if Harris maintains a fixed D/E ratio of 1/1 and finances the project with this D/E ratio (in $ thousand)?
(Round to two decimal places.)
(Round to two decimal places.)
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