Question
Racks IT inc. is considering a diversifying project in the education industry. The project would require an investment of $350M today and generate expected free
Racks IT inc. is considering a diversifying project in the education industry. The project would require an investment of $350M today and generate expected free cash flows of $40M per year in perpetuity. The financing of this project would involve a target debt-to-equity ratio of 1.5 (fixed ratio) and a 7.5% cost of debt. The corporate tax rate is 40%, which is the only relevant market imperfection. IQ Inc is a public firm in the education industry. IQ has currently a target debt-to-equity ratio of 1, with a cost of debt of 6% and a cost of equity of 12%. ssume (correctly or incorrectly) that the projects rWACC is 8%. Compute the project's Net Present Value using the WACC method, and find the amount of new equity IT will have to initially issue for the project.
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