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TerraCorp is about to open up a new branch in Lincoln. It will cost $35M today to set up, and will result in $9M in EBIT per year for the next 8 years, starting one year from today. TerraCorp is going to borrow $20M of the startup costs for 8 years, at a rate of 3.2%. EarthCo, a firm with very similar operations, has a levered cost of equity of 15%, a debt-to-equity ratio of 2, and a cost of debt of 6%. The corporate tax rate is 25%.
A) What is TerraCorp's cost of unlevered equity?
B) What is the present value of the tax shield from TerraCorp's debt?
C) What is the APV value of this project?

Sagot :

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