Tài liệu bài tập thưc hành môn Tài chính doanh nghiệp_ Chapter 17 | Chapter 17 Valuation and Capital Budgeting for the Levered Firm a. The maximum price that Hertz should be willing to pay for the fleet of cars with allequity funding is the price that makes the NPV of the transaction equal to zero. NPV -Purchase Price PV 1- TC Earnings Before Taxes and Depreciation PV Depreciation Tax Shield Let P equal the purchase price of the fleet. NPV -P 1OO OOO P 5 Set the NPV equal to zero. 0 -P 1OO OOO P 5 P 250 P 5 P 250 250 P 337 095 Therefore the most that Hertz should be willing to pay for the fleet of cars with all-equity funding is 337 095. b. The adjusted present value APV of a project equals the net present value of the project if it were funded completely by equity plus the net present value of any financing side effects. In Hertz s case the NPV of financing side effects equals the after-tax present value of the cash flows resulting from the firm s debt. APV NPV All-Equity NPV Financing Side Effects NPV All-Equity NPV -Purchase Price PV 1- TC Earnings Before Taxes and Depreciation PV Depreciation Tax Shield Hertz paid 325 000 for the fleet of cars. Because this fleet will be fully depreciated over five years using the straight-line method annual depreciation expense equals 65 000 325 000 5 . NPV - 325 000 1OO OOO 65 OOO 8 968 NPV Financing Side Effects The net present value of financing side effects equals the after-tax present value of cash flows resulting from the firm s debt. NPV Financing Side Effects Proceeds - After-Tax PV Interest Payments -PV Principal Payments Given a known level of debt debt cash flows should be discounted at the pre-tax cost of debt rB 8 . NPV Financing Side Effects 200 000 - 1 - 2OO OOO - 200 000 5 21 720 APV APV NPV All-Equity NPV Financing Side Effects 8 968 21 720 30 688 Therefore if Hertz uses 200 000 of five-year 8 debt to fund the 325 000 .
