Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the APV method,what is the value of the debt side effects?

Question

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions:  The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the APV method,what is the value of the debt side effects?

Quizplus · Accepted Answer

To calculate the value of the debt side effects using the APV method, we need to follow these steps:

1. Calculate the value of the unlevered firm (VU) by discounting the free cash flows to the firm (FCFF) at the all-equity required rate of return (re):

VU = Σ FCFFt / (1 + re)t

VU = $1,310.81 million

2. Calculate the present value of the tax shield (PVTS) by discounting the tax savings due to interest payments at the yield to maturity (YTM) of the debt:

PVTS = Σ (1 - τ) x TCt / (1 + YTM)t

PVTS = $66.89 million

3. Calculate the value of the debt side effects (DSE) as the difference between the levered firm value (VL) and the unlevered firm value (VU):

DSE = VL - VU

DSE = PVTS / (1 - D/E)

DSE = $66.89 million / (1 - 3)

DSE = $239.07 million

Therefore, the value of the debt side effects is $66.89 million, which is option B.

Consider a Project of the Cornell Haul Moving Company,the Timing