A firm is considering a project that will generate perpetual cash flows of $25,0

Question

A firm is considering a project that will generate perpetual cash flows of $25,000 per year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity costs 15% and debt costs 6% on an aftertax basis. The firm's DE ratio is 1.2, what is the most the firm can pay for the project and still earn its required returm? 13. a. $184,911 b. $212,257 c. $247,770 d. $276,502 e. $366,253 14. A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would

Explanation / Answer

Step-1

WACC=(5/11)*0.15+(6/11)*0.06

            =10.09%

Step-2

Present value= Cash flow/WACC

                     =$25,000/10.09%

                    = $247,770

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