Question
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.
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
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