Corporate Finance Quiz
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PROBLEM-SOLVING & CORPORATE FINANCE REASONING
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Apex Manufacturing is evaluating a new production facility investment. The company's analysts have prepared two sets of cash flow projections: one in nominal terms incorporating expected inflation of 3% annually, and another in real terms (constant purchasing power). The firm's nominal cost of equity is 12%, and its real cost of equity is 8.74%. The nominal after-tax cost of debt is 6%, while the real after-tax cost of debt is 2.91%. The company's target capital structure is 60% equity and 40% debt.
If the analysts mistakenly use the real weighted average cost of capital to discount nominal cash flows, what will be the impact on the calculated net present value compared to the correct approach?
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