Question
Smart Stack Inc. is in the book shelf manufacturing business. The corporate tax rate is 21 percent. The VP of R&D has proposed a new
Smart Stack Inc. is in the book shelf manufacturing business. The corporate tax rate is 21 percent.
The VP of R&D has proposed a new venture. The project requires an initial outlay of $785,000 and is expected to result in a $93,000 cash inflow at the end of the first year. The project will be financed at the companys target debt-equity ratio.
Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter.
The company currently has a target debt-equity ratio of 0.40, but the industry target debt-equity ratio is 0.35. The industry average beta is 1.2. The market risk premium is 7 percent and the risk-free rate is 5 percent.
Smart Stack, like all other firms is this industry, can borrow at the riskless interest rate. All companies in this industry can issue debt at the risk-free rate.
Should Smart Stack invest in the project?
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