# 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?

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?

## Answer to relevant Questions

XL Sports is expected to generate free cash flows of $10.9 million per year. XL has permanent debt of $40 million, a tax rate of 40%, and an unlevered cost of capital of 10%.a. What is the value of XL’s equity using the ...Assume that Ideko’s market share will increase by 0.5% per year rather than the 1% used in the chapter. What production capacity will Ideko require each year? When will an expansion become necessary (when production volume ...Reproduce Ideko’s balance sheet and statement of cash flows, assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected ...Explain the meanings of the following financial terms:a. Optionb. Expiration datec. Strike priced. Calle. PutThe current price of Estelle Corporation stock is $25. In each of the next two years, this stock price will either go up by 20% or go down by 20%. The stock pays no dividends. The one-year risk-free interest rate is 6% and ...Post your question

0