Hertz: Depreciation and Present Value

 Hertz: Downgrading and Present Value Composition

Chapter 17: Valuation and Capital Cash strategy for the Levered Company

17. 1Honda and GMC are competitive to sell a fleet of twenty-five cars to Hertz. Hertz fully depreciates all of its rental cars over five years using the straight-line method. The firm needs the fleet of 25 automobiles to generate hundred buck, 000 per year in revenue before income taxes and downgrading for five years. Hertz is an all-equity organization in the 34-percent tax bracket. The required returning on the firm's unlevered value is 10 percent, and the fresh fleet will not likely add to the risk of the firm.

a. What is the maximum price that Hertz should be offering for the newest fleet of automobiles if it remains to be an all-equity firm? w. Suppose Hertz purchases the fleet via GM for $325, 500, and Hertz is able to issue $200, 500 of five yr, 8% financial debt in order to financial the job. All main will be repaid in one balloon payment towards the end of the 5th year. Precisely what is the Adjusted Present Benefit (APV) of the project?

17. 1a. The utmost price that Hertz should be willing to pay for the fleet of cars with all-equity financing is the price that makes the NPV from the transaction equal to zero.

NPV sama dengan -Purchase Cost + PV[(1- TC )(Earnings Just before Taxes and Depreciation)] +

PV(Depreciation Tax Shield)

Let P equal the price of the fast.

NPV = -P + (1-0. 34)($100, 000)A50. 10 & (0. 34)(P/5)A50. 10

Established the NPV equal to no.

0 = -P + (1-0. 34)($100, 000)A50. 12 + (0. 34)(P/5)A50. twelve

P= $250, 191. 93 + (P)(0. 34/5)A50. 15

P sama dengan $250, 191. 93 & 0. 2578P

0. 7422P = $250, 191. 93

P sama dengan $337, 095

Therefore , the most that Hertz should be willing to pay for the fleet of autos with all-equity funding can be $337, 095.

b. The adjusted present value (APV) of a task equals the web present value of the project if it were funded completely by equity plus the net present worth of any financing side effects. In Hertz's case, the NPV of financing unwanted effects equals the after-tax present value from the cash...


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