Question
REI is evaluating a proposal for a new alpine snowshoe targeted at mountaineering enthusiasts. The project is expected to last three years and will generate
REI is evaluating a proposal for a new alpine snowshoe targeted at mountaineering enthusiasts. The project is expected to last three years and will generate annual free cash flows as shown in the table below. REI targets a debt-to-enterprise value ratio of 40% for all of its projects. The firm has a current cost of debt of 4%, a current cost of equity for 12%, and a marginal tax rate of 30%. Assume that the new project is of average risk to REI. Based on the WACC method, how much additional debt financing must the company take on today as a direct result of taking on his project? Select the best answer.
| Free Cash Flow Projects (in $ millions) | ||||
| Year | 0 | 1 | 2 | 3 |
| Free Cash Flows | -80 | 40 | 60 | 35 |
| I. | $46.24 million | |
| II. | $22 million | |
| III. | $14.24 million | |
| IV. | $32 million | |
| V. | $54 million |
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Commodity Trade And Finance
Authors: Michael Tamvakis
2nd Edition
041573245X, 978-0415732451
