Net Present Value of the Project Assignment | Homework For You

1. Trucks R’ Us has a market capitalization of $142 billion, $78 billion in BB rated debt, and $10 billion in cash. If Trucks R’ Us’ equity beta is 1.68, then their underlying asset beta is closest to:

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A) 1.00

B) 1.20

C) 1.32

D) 1.48

E) 2.13Homework For You

2. Alpha Industries is considering a project with an initial cost of $7.4 million. The project will produce cash inflows of $1.54 million a year for 7 years. The firm has a pre-tax cost of debt of 8.6 percent and a cost of equity of 13.7 percent. The debt-equity ratio is 0.65 and the tax rate is 35 percent. What is the net present value of the project?

Hint: WACC is the discount rate to calculate NPV. If debt-equity ratio is 0.65, Wd is 0.65/1.65

A) -$372,951

B) -$187,016

C) $-25,700

D) $133,333

E) $269,480

3. Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI’s marginal tax rate is 35%. Ignoring the original investment of $5 million, what is THSI’s free cash flow for the first and only year of operation?

A) $5.0 million

B) $3.75 million

C) $8.0 million

D) $6.25 million

E) $7.00 million

4. In September 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield their future income from taxes (prior law restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquires Covia Bank and with it acquires $74 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of 10 billion per year in the future, and its tax rate is 30%, what is the present value of these acquired tax loss carryforwards given a cost of capital of 8%?

NOTE: Assume that the firm can use tax loss carryforwards to write-off 100% of its earnings

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