A firm is contemplating a new project that will generate an additional $4,000,000 in pretax income at a tax rate of 30% (if only financed with extra debt). Current earnings per share are $2.00, the existing market P/E is 10.0 times and there are 1.1 million shares outstanding For the expansion, plant and equipment will increase from $32.0 to $40 million. Question 1: All new equipment will be financed by equity. If the project goes through the firm's p/e multiple is expected to increase by a factor of 1.4 times. Question 2: It can also fund 60% of the required extra funds through bonds at a 8% interest rate and the rest through equity? If debt is used at 60%, the p/e ratio will be 15 times. Should the company go through with the project?

Answer rating: 100% (QA)

Question 1 Given the information provided the company should proceed with the project as it will ben... View the full answer