Question
[Q24-35] Your firms market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M Equity $300M
[Q24-35] Your firms market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M Equity $300M Asset Value $530M Debt + Equity $530M Assume that the you plan to keep the firms debt-to-equity ratio fixed. The firms corporate tax rate is 50%. The firms cost of debt is 10% and cost of equity is 20%. Now, suppose that you are considering a new project that will last for one year. According to your analysis, free cash flows from the project are -$1,000 today (i.e. year 0) and $1,322.40 one year from today (i.e. year 1). This new project can be viewed as a carbon copy of the entire firms existing business. You want to find the NPV of the project using three different DCF methods: WACC/APV/FTE.
Which of the following serves as the discount rate for free cash flows to equity?
A. | 10% | |
B. | 14% | |
C. | 20% | |
D. | 16% |
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