39. Under the firms debt policy, the amount of debt associated with the project at the end of year 1 will be?

(A) $ 55.50M

(B) $ 42.46M

(C) $ 36.87M

(D) $ 27.66M (correct answer)

40. Under the firms debt policy, the interest tax shield (IT S) associated with the project at the end of year 2 is closest to:

(A) $ 1.05M

(B) $ 0.89M

(C) $ 0.58M (correct answer)

(D) $ 0.42M

Energy Corp. has a market capitalization of $15 billion and debt with market value of $5 billion. Energy will keep its current Debt/Equity ratio constant. The equity cost of capital is re = 10% and the cost of debt is rp = 6%. The corporate tax rate is 35%. Assume a market risk premium of 6% and a risky-free rate of 5%. The firm is considering an expansion project i.e., same risk as the firm's existing assets) with the following cash flows: Year 0 1 2 Free Cash Flows (SM)-100 70 120 Energy Corp. has a market capitalization of $15 billion and debt with market value of $5 billion. Energy will keep its current Debt/Equity ratio constant. The equity cost of capital is re = 10% and the cost of debt is rp = 6%. The corporate tax rate is 35%. Assume a market risk premium of 6% and a risky-free rate of 5%. The firm is considering an expansion project i.e., same risk as the firm's existing assets) with the following cash flows: Year 0 1 2 Free Cash Flows (SM)-100 70 120