Assignment 2-Accounting Homework Help
1. What is the value, and net present value of the project, if it is entirely equity financed?
2. Suppose that Pinnacle Videos assumes a fixed level of debt of $750,000. Use the adjusted
present value (APV) approach to determine the value, and net present value, of the
project.
3. Suppose that Pinnacle Videos assumes debt so as to maintain a debt ratio of 25% (in
market value terms). Determine the value, and net present value, of the project using:
a. The weighted average cost of capital (WACC) approach
i. What are the implied debt levels of the project?
ii. What do the debt levels look like beyond 2006? What is the growth rate in
debt?
b. The flow to equity (FTE) approach
i. What do levered cash flows look like beyond 2006? What is the growth
rate in levered cash flows?
c. The capital cash flows (CCF) approach
i. What do capital cash flows look like beyond 2006? What is the growth
rate in capital cash flows?
d. The adjusted present value (APV) approach
i. What do interest tax shields look like beyond 2006? What is the growth
rate in interest tax shields?
You should confirm that the net present value of the project is the same in parts (a) – (d).
Hint: For questions 1 – 3 above, you may find it useful to forecast numbers beyond 2006 to year
2008 or 2009, accounting for terminal value growth rate of 5%.
