【正文】 ’s weighted average cost of capital equals: RWACC = [B / (B + S)](1 – tC)RB + [S / (B + S)]RS So we need the debtvalue and equityvalue ratios for the pany. The debtequity ratio for the pany is: B/S = B = Substituting this in the debtvalue ratio, we get: B/V = .35S / (.35S + S) B/V = .35 / B/V = .26 And the equityvalue ratio is one minus the debtvalue ratio, or: S/V = 1 – .26 S/V = .74 So, using the capital structure weights, the pany’s WACC is: RWACC = [B / (B + S)](1 – tC)RB + [S / (B + S)]RS RWACC = .26(1 – .40)(.09) + .74(.1868) RWACC = .1524 or % We can use the weighted average cost of capital to discount the firm’s unlevered aftertax earnings to value the pany. Doing so, we find: VL = $6,936,000 / .1524 VL = $45,520, Now we can use the debtvalue ratio and equityvalue ratio to find the value of debt and equity, which are: B = VL(Debtvalue) B = $45,520,(.26) B = $11,801, S = VL(Equityvalue) S = $45,520,(.74) S = $33,719, d. In order to value a firm’s equity using the flowtoequity approach, we can discount the cash flows available to equity holders at the cost of the firm’s levered equity. First, we need to calculate the levered cash flows available to shareholders, which are: Sales$28,900,000Variable costs17,340,000EBIT$11,560,000Interest1,062,149EBT$10,497,851Tax4,199,140Net ine$6,298,711 So, the value of equity with the flowtoequity method is: S = Cash flows available to equity holders / RS S = $6,298,711 / .1868 S = $33,719,16. a. Since the pany is currently an allequity firm, its value equals the present value of its unlevered aftertax earnings, discounted at its unlevered cost of capital. The cash flows to shareholders for the unlevered firm are:EBIT$83,000Tax33,200Net ine$49,800 So, the value of the pany is: VU = $49,800 / .15 VU = $332,000 b. The adjusted present value of a firm equals its value under allequity financing plus the net present value of any financing side effects. In this case, the NPV of financing side effects equals the aftertax present value of cash flows resulting from debt. Given a known level of debt, debt cash flows should be discounted at the pretax cost of debt, so: NPV = Proceeds – Aftertax PV(Interest payments) NPV = $195,000 – (1 – .40)(.09)($195,000) / NPV = $78,000 So, using the APV method, the value of the pany is: APV = VU + NPV(Financing side effects) APV = $332,000 + 78,000 APV = $410,000 The value of the debt is given, so the value of equity is the value of the pany minus the value of the debt, or: S = V – B S = $410,000 – 195,000 S = $215,000 c. According to ModiglianiMiller Proposition II with corporate taxes, the required return of levered equity is: RS = R0 + (B/S)(R0 – RB)(1 – tC) RS = .15 + ($195,000 / $215,000)(.15 – .09)(1 – .40) RS = .1827 or % d. In order to value a firm’s equity using the flowtoequity approach, we can discount the cash flows available to equity holders at the cost of the firm’s levered equity. First, we need to calculate the levered cash flows available to shareholders, which are: EBIT$83,000Interest17,550EBT$65,450Tax26,180Net ine$39,270 So, the value of equity with the flowtoequity method is: S = Cash flows available to equity holders / RS S = $39,270 / .1827 S = $215,00017. Since the pany is not publicly traded, we need to use the industry numbers to calculate the industry levered return on equity. We can then find the industry unlevered return on equity, and relever the industry return on equity to account for the different use of leverage. So, using the CAPM to calculate the industry levered return on equity, we find: RS = RF + β(MRP) RS = 5% + (7%) RS = % Next, to find the average cost of unlevered equity in the holiday gift industry we can use ModiglianiMiller Proposition II with corporate taxes, so: RS = R0 + (B/S)(R0 – RB)(1 – tC) .1340 = R0 + (.35)(R0 – .05)(1 – .40) R0 = .1194 or % Now, we can use the ModiglianiMiller Proposition II with corporate taxes to relever the return on equity to account for this pany’s debtequity ratio. Doing so, we find: RS = R0 + (B/S)(R0 – RB)(1 – tC) RS = .1194 + (.40)(.1194 – .05)(1 – .40) RS = .1361 or % Since the project is financed at the firm’s target debtequity ratio, it must be discounted at the pany’s weighted average cost of capital. In a world with corporate taxes, a firm’s weighted average cost of capital equals: RWACC = [B / (B + S)](1 – tC)RB + [S / (B + S)]RS So, we need the debtvalue and equityvalue ratios for the pany. The debtequity ratio for the pany is: B/S = B = Substituting this in the debtvalue ratio, we get: B/V = .40S / (.40S + S) B/V = .40 / B/V = .29 And the equityvalue ratio is one minus the debtvalue ratio, or: S/V = 1 – .29 S/V = .71 So, using the capital structure weights, the pany’s WACC is: RWACC = [B / (B + S)](1 – tC)RB + [S / (B + S)]RS RWACC = .29(1 – .40)(.05) + .71(.1361) RWACC = .1058 or % Now we need the project’s cash flows. The cash flows increase for the first five years before leveling off into perpetuity. So, the cash flows from the project for the next six years are:Year 1 cash flow$80,Year 2 cash flow$84,Year 3 cash flow$88,Year 4 cash flow$92,Year 5 cash flow$97,Year 6 cash flow$97, So, the NPV of the project is: NPV = –$475,000 + $80,000/ + $84,000/ + $88,200/ + $92,610/ + $97,+ ($97,)/ NPV = $408,