Zoso Is A Rental Car Company That Is Trying To

Question

Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The…

Zoso is a rental car company that is trying to determine whether
to add 25 cars to its fleet. The company fully depreciates all its
rental cars over five years using the straight-line method. The new
cars are expected to generate $165,000 per year in earnings before
taxes and depreciation for five years. The company is entirely
financed by equity and has a 38 percent tax rate. The required
return on the company’s unlevered equity is 12 percent, and the new
fleet will not change the risk of the company. The risk-free rate
is 7 percent.

  

a.

What is the maximum price that the company should be willing to
pay for the new fleet of cars if it remains an all-equity company?
(Do not round intermediate calculations and round your
answer to 2 decimal places, e.g., 32.16.)

  

  Maximum price $   

  

b.

Suppose the company can purchase the fleet of cars for $415,000.
Additionally, assume the company can issue $305,000 of five-year
debt at the risk-free rate of 7 percent to finance the project. All
principal will be repaid in one balloon payment at the end of the
fifth year. What is the adjusted present value (APV) of the
project? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)

  

  APV $   

Solutions

Expert Solution


Submit Your Answer

[contact-form-7 id=”5″ html_class=”cf7_custom_style_1″ title=”Answer Question”]