Review the mini case on page 477 of your text. Fiera Corporation is evaluating a new project that costs $45,000. The project will be financed using 40% debt and 60% equity, thus maintaining the firm’s current debt-to-equity ratio. The firm’s stockholders have a required rate of return of 18.36%, and its bondholders expect a 10.68% rate of return. The project is expected to generate annual cash flows of $13,000 before taxes for the next two decades. Fiera Corporation is in the 36% tax bracket.
- Determine the firm’s weighted average cost of capital (WACC).
- Calculate the traditional net present value (NPV) of the project using the WACC. Should the project be undertaken?
- Using Modigliani and Miller’s Proposition II, determine the required return on unlevered equity.
- Use the adjusted present value (APV) method to determine whether or not the project should be undertaken.
- Use the flow-to-equity (FTE) method to calculate whether or not the project should be undertaken