Question

# Suppose the Luka Lu resorts company has both debt and equity trading in markets. The firm’s current market value

of equity is $14,010,000 and the market value of its debt is $11,704,545. Assume the tax rate is 30%.

The firm has twelve thousand bonds outstanding which mature 1 year from now. Each bond has a face value of $1000 and an annual coupon. The coupon rate is 3%. A coupon payment has just been paid.

You may assume the risk-free rate of return is 2% and the expected return of the market portfolio is 6%. The firm has an equity beta of 1.534.

The company is currently facing an investment opportunity with risk equivalent to the company’s current operations. The project has an initial cash outflow of $1,000,000, and the project is expected to have perpetual cash inflows after the initial date such that the payback period of the project is 19 years.

Ignore depreciation, and assume that the current capital structure will remain constant. Compute the NPV of the project, and decide whether the company should proceed with this project.

Book1 – Microsoft Excel

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Finance