Dee's Toys is considering a project that will cost $1 million. This project will generate after-tax...
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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 firm's 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. 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 firm's 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.
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Heres a breakdown of the statements and whether they are correct I An increase in DE ratio will incr... View the full answer
Related Book For
Financial Management Theory and Practice
ISBN: 978-1305632295
15th edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt
Posted Date:
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