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Category > Business & Finance Posted 15 Jul 2017 My Price 8.00

Adjusted-Present-Value Approach

Adjusted-Present-Value Approach

Honda and GM are competing to sell a fleet of cars to Hertz. Hertz’s policies on its rental cars include use of straight-line depreciation and disposing of the cars after five years. Hertz expects that the autos will have no salvage value. The firm expects a fleet of 25 cars to generate $100,000 per year in pretax income. Hertz is in the 34-percent tax bracket, and the firm’s overall required return is 10 percent. The addition of the new fleet will not add to the risk of the firm. Treasury bills are priced to yield 6 percent.

a. What is the maximum price that Hertz should be willing to pay for the fleet of cars?

b. Suppose the price of the fleet (in U.S. dollars) is $325,000; both suppliers are charging this price. Hertz is able to issue $200,000 in debt to finance the project. The bonds can be issued at par and will carry an 8-percent interest rate. Hertz will incur no costs to issue the debt and no costs of financial distress. What is the APV of this project if Hertz uses debt to finance the auto purchase?

c. To entice Hertz to buy the cars from Honda, the Japanese government is willing to lend Hertz $200,000 at 5 percent. Now what is the maximum price that Hertz is willing to pay Honda for the fleet of cars?

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Homework Helper
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Status NEW Posted 15 Jul 2017 09:07 AM My Price 8.00

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