Question: Dee's Toys is considering a project that will cost $1 million. This project will generate after-tax cash flows of $310,500 per year for 5 years.

  1. Dee's Toys is considering a project that will cost $1 million. This project will generate after-tax cash flows of $310,500 per year for 5 years. The firms target D/E ratio is 0.25. The flotation cost for equity is 5%, and the flotation cost for debt is 3%. Which of the following statement is correct, assuming discount rate is 11%?

    I. an increase in D/E ratio will increase the NPV of this project.

    II. the firm should accept this project because it will generate a positive NPV of $99,348.99 after considering flotation cost.

    III. the firm should accept this project because it will generate a positive NPV of $35,017.22

    after considering flotation cost.

    IV. the NPV of this project will increase if the cost increases.

    A.

    II and IV only
    B.

    II only
    C.

    I and II
    D.

    I and III

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