Part 1: Suppose you are told a project youre analyzing was going to be financed with bonds that have interest expense of $100,000 per year. If your company is in the 40% tax bracket, what effect will this have on your cash flow calculation?

a. reduce it by $100,000 per year

b. reduce it by $100,000(1 - .40) per year

c. reduce it by $100,000 (.40) per year

d. interest expense should not be included in the cash flows.

Part 2: Suppose you have just analyzed a project using the cost of capital for your company, assume 10%. After further analysis you estimate the asset beta for the project is .7 when the risk free rate is 2% and the expected return on the market is 12% , you should:

a. adjust the cost of capital for the project to 12%

b. leave the cost of capital alone, it is 10%

c. adjust the cost of capital for the project to 9%

d. it depends Part 3: Suppose a company has interest expense of $100,000 per year. If this company is in the 40% tax bracket, what is the after tax cost of this?

a. $100,000 per year

b. $100,000(1 - .40) per year

c. $100,000 (.40) per year

d. none of the above