Projects That Are Not Scale Enhancing Blue Angel, Inc., a private firm in the holiday gift industry,

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Projects That Are Not Scale Enhancing Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .40, but the industry target debt–equity ratio is .35. The industry average beta is 1.2. The market risk premium is 7 percent, and the risk-free rate is 5 percent. Assume all companies in this industry can issue debt at the riskfree rate. The corporate tax rate is 40 percent. The project requires an initial outlay of $675,000 and is expected to result in a $95,000 cash inflow at the end of the first year. The project will be financed at Blue Angel’s target debt–equity ratio. Annual cash flows from the project will grow at an constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter. Should Blue Angel invest in the project?

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Corporate Finance With Connect Access Card

ISBN: 978-1259672484

10th Edition

Authors: Stephen Ross ,Randolph Westerfield ,Jeffrey Jaffe

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