Question: Problem 2.1. Cerro Corp. is valuing a new project that requires an initial investment of $59 million and will result in free cash flows of

Problem 2.1. Cerro Corp. is valuing a new project that requires an initial investment of

$59 million and will result in free cash flows of $5 million next year. The free cash flows will increase by 4% every year in perpetuity. The project represents average risk for Cerro.

Cerros debt to equity ratio is 3:5 and it will maintain this ratio in future. Cerros cost of equity is l5% and it cost of debt is 6%. The corporate tax rate is 20%. What is the value of the project to Cerro?

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