Question

Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 9%. Arden’s marginal corporate tax rate is 40%, and its debt cost of capital is 5%.
a. Suppose Arden adjusts its debt continuously to maintain a constant debt-equity ratio of 50%. What is the appropriate WACC for the new project?
b. Suppose Arden adjusts its debt once per year to maintain a constant debt-equity ratio of 50%. What is the appropriate WACC for the new project now?
c. Suppose the project has free cash flows of $10 million per year, which are expected to decline by 2% per year. What is the value of the project in parts a and b now?



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  • CreatedAugust 06, 2014
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