A project will give a one-time cash flow of $25,000 after one year. If the project risk requires a return of 12%, what is the levered value of the firm with perfect capital markets?

Question

Quizplus · Accepted Answer

The levered value of the firm can be calculated using the following formula:
Levered value of the firm = (Unlevered firm value) + (PV of tax shield)
Since this is a one-time cash flow after a year, we can use the formula for present value of a single future cash flow:
PV = CF / (1 + r)^n
where CF = $25,000, r = 12%, and n = 1.
PV = $25,000 / (1 + 0.12)^1 = $22,321.43
The unlevered firm value can be calculated by dividing the cash flow by the required return:
Unlevered firm value = CF / r = $25,000 / 0.12 = $208,333.33
Finally, we can calculate the levered value of the firm:
Levered value of the firm = $208,333.33 + $22,321.43 = $230,654.76
Therefore, the answer is (B) $22,321.

A Project Will Give a One-Time Cash Flow of $25,000