Question
Polar Inc. is considering a project that will provide the following benefits: Year 1: $350,000 Year 2: $650,000 Year 3: $800,000, this will grow at
- Polar Inc. is considering a project that will provide the following benefits:
Year 1: $350,000
Year 2: $650,000
Year 3: $800,000, this will grow at 2% indefinitely
The firm has a target debt to equity ratio of 0.9
The 30 year Government of Canada rate is 1.5%
The Companys Beta is 1.3
The return on the entire equity market is 7%
The company has debt outstanding with 22 years to maturity that is quoted at 98 percent of face value. The issue makes semiannual payments and has an embedded cost of 5% annually. The par value is $1000. The corporate tax rate is 35%.
This project is riskier than usual projects that the firm undertakes. Management uses its judgement to apply an adjustment factor of +5% to the cost of capital of for this riskier project.
Under what circumstances should the company take on this project?
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