Wednesday 6 June 2012

Your company is considering an investment in a project which would

 Your company is considering an investment in a project which would require an initial outlay of $300,000 and produce expected cash flows in Years 1 through 5 of $87,385 per year. You have determined that the current after-tax cost of the firm’s capital (required rate of return) for each source of financing is as follows:
Cost of debt8%
Cost of preferred stock12%
Cost of common stock16%
Long-term debt currently makes up 20% of the capital structure, preferred stock 10%, and common stock 70%. What is the net present value of this project?
A.   $1,568 B.   $463 C.   $1,241 D.   $871
 

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