A Project Has a NPV, Assuming All Equity fiNancing, of €1.5

question 46

Essay

A project has a NPV, assuming all equity financing, of €1.5 million.To finance the project, debt is
issued with associated flotation costs of €60,000.The flotation costs can be amortized over the
project's 5 year life.The debt of €10 million is issued at 10% interest, with principal repaid in a lump
sum at the end of the fifth year.If the firm's tax rate is 34%, calculate the project's APV.

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Definitions:

Loaned Funds

Money that is borrowed, typically from a financial institution, which requires repayment with interest.

Coupon Rate

The percentage of the face value that is paid as interest on a bond annually.

Dividend Growth Model

A valuation method that estimates the price of a stock based on the assumption that dividends will increase at a constant growth rate.

Expected Growth Rate

The anticipated rate at which a company, asset, or economy is expected to grow in the future.