Question
The firm Ever Growing is considering a project with the following characteristics. Sales will be $100 MM for sure in the first year with the
The firm Ever Growing is considering a project with the following characteristics.
Sales will be $100 MM for sure in the first year with the long-term
growth rate is 5%.
Gross Profit Margin (Gross Profit over Sales) will be 25%.
All cash flows defined here (except for Year 1) are deterministic and will go on indefinitely.
The Corporate Tax Rate is 40%.
The project is funded by Riskless Debt, Preferred Stocks with beta 0.2,
and Common Stocks with beta 1.3 with equal weight.
The cash flow stream that goes from time 0 on indefinitely is similar in nature to a long-term treasury bond.
A risk premium of 8.6 and a treasury rate of 5.
Interest payment is NOT tax deductible.
Ignoring depreciation.
What is the investment cost to make the project break-even?
A. 348.8
B. 416.7
C. 581.4
D. 694.4
Answer: A
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