Question
CSL Corporation is a mid-sized transportation firm with 10 million shares outstanding, trading at $ 30 per share and debt outstanding of $ 1 0
CSL Corporation is a mid-sized transportation firm with 10 million shares outstanding, trading at $30 per share and debt outstanding of $100 million.
CSL Corporation is considering a project and it has twooptions to finance this project:
Required:
1. Calculate cost of capital under each option.
2. Which option should you go ahead with? Explain your choice.
3. What would happen to the value of the firm under your chosen Option? (zero growth rate)
4. What would happen to the stock price under your chosen Option? (zero growth rate)
5. Assume that you choose Option 1 to finance the project. This project has expected before-tax revenues of $50 million and costs of $30 million a year in perpetuity. Is this a desirable project by your criteria? Why or why not?
6. Does it make a difference in your decision if you were told that the cash flows from the project in (5) are certain?
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