QUESTION 18

[Q18-Q23] You are evaluating a 1-year project that is in line with the firms existing business. Specifically, this new project requires an investment of $1,200 in free cash flow today, but will generate $1,600 one year from today. The project will be partially financed with a 1-year maturity debt whose face value is $200 and interest rate is 10%.

Suppose that you estimated the cost of equity as 20%, based on the firms stock data. However, you were not able to estimate the cost of debt because your firms total debt consists of long-term debt, short-term debt, investment grade debt, and debt with different levels of collateral. Assume that the corporate tax rate is 30%.

What is the effective after-tax interest expense at year 1?

	A.	$80
	B.	$21
	C.	$155
	D.	$14

QUESTION 19

What is the net borrowing (i.e. net debt issuance) at year 0? What is the net borrowing at year 1?

	A.	-$200; $200
	B.	-$200; -$200
	C.	$200; -$200
	D.	$200; $200

QUESTION 20

What is the free cash flow to equity (FCFE) at year 0 (i.e. today)? (Hint: Since you just issued the debt, the interest payment at time 0 is simply zero.)

	A.	-$1,386
	B.	-$1,000
	C.	$1,000
	D.	$1,386