Hot Tamales, a firm with a target debt/equity ratio of 0.8, has an after-tax cost of...
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Hot Tamales, a firm with a target debt/equity ratio of 0.8, has an after-tax cost of debt of 7.5%. Equity holders in Hot Tamales have a required rate of return of 18%. The company is considering investing in a project with the cash flows below. This project is riskier than the average project of the company. To compensate for this, the company adds 2.5 percentage points to their average weighted cost of capital. Should Hot Tamales undertake this project? Time Period 0 1 2 3 4 Cash Flow -$25,000 5,000 8,000 12,000 6,000 Hot Tamales, a firm with a target debt/equity ratio of 0.8, has an after-tax cost of debt of 7.5%. Equity holders in Hot Tamales have a required rate of return of 18%. The company is considering investing in a project with the cash flows below. This project is riskier than the average project of the company. To compensate for this, the company adds 2.5 percentage points to their average weighted cost of capital. Should Hot Tamales undertake this project? Time Period 0 1 2 3 4 Cash Flow -$25,000 5,000 8,000 12,000 6,000
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Based on the image Hot Tamales should undertake the project because the NPV is positive The NPV is c... View the full answer
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
Posted Date:
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