A project\'s payback period is determinedto be four years. If it is later discov

Question

A project's payback period is determinedto be four years. If it is later discovered that additionalcash flows will be generated in years five and six, then:
A. the project's payback period will be reduced
B. the project's payback period will be increased.
C. the project's payback period will be unchanged
D. the discount rate must be known to determine whether thepayback period changes. What is the pretax cost of debt for a firm in the 35%tax bracket that has a 10% after-tax cost of debt?
A. 5.85%
B. 12.15%
C. 15.38%
D. 25.71% What appears to be the targeted debt ratio of a firmthat issues $15 million in bonds and $35 million in equity tofinance its new capital projects?
A. 15.00%B. 30.00%C. 35.00%D. 60.00% A project's payback period is determinedto be four years. If it is later discovered that additionalcash flows will be generated in years five and six, then:
A. the project's payback period will be reduced
B. the project's payback period will be increased.
C. the project's payback period will be unchanged
D. the discount rate must be known to determine whether thepayback period changes. What is the pretax cost of debt for a firm in the 35%tax bracket that has a 10% after-tax cost of debt?
A. 5.85%
B. 12.15%
C. 15.38%
D. 25.71% What appears to be the targeted debt ratio of a firmthat issues $15 million in bonds and $35 million in equity tofinance its new capital projects?
A. 15.00%B. 30.00%C. 35.00%D. 60.00% What appears to be the targeted debt ratio of a firmthat issues $15 million in bonds and $35 million in equity tofinance its new capital projects?
A. 15.00%B. 30.00%C. 35.00%D. 60.00%

Explanation / Answer

 (1)  Option ( c) the project’s payback period will be unchanged

(2)    Calculating Pre-tax Cost of Debt:

               After-tax Cost of Debt = 10%

 Pre-tax Cost of Debt      = X (1-0.35) = 10%

 Pre-tax Cost of Debt      = X (0.65)   = 0.10

                Pre-tax Cost of Debt      = 0.1538 (or) 15.38%

(3) Calculating Targeted Debt Ratio:

                Debt                      $15,000,000

                Equity                    $35,000,000

                                        ---------------

 TOTAL                    $50,000,000

                                          ---------------

 Targeted Debt Ratio    = $15,000,000 / $50,000,000

                Targeted Debt Ratio    =   0.30 (or) 30%                          

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