Question
You are the CEO of Caesar Little. You are considering a project with an initial investment of $750,000. The annual cash flow of the project
You are the CEO of Caesar Little. You are considering a project with an initial investment of $750,000. The annual cash flow of the project is 78,000 that continues forever (perpetuity)and the discount rate is 10 percent. The company can issue equity at a flotation cost of 5.5 percent and debt at 3.00 percent. The firm currently has a debt-equity ratio of 0.70. The firm is considering two scenarios. First, all funds will be raised externally. Second, sixty (60) percent of equity will come from retained earnings (internal sources).
What should the firm use as their weighted average flotation cost for the two scenarios?
If the firm has to invest $750,000 to purchase the machine for the project how much money does it have to raise (round to the nearest dollar) in each of the two scenarios?
What is the present value of the future cash flows (remember, the cash flow is a perpetuity)?
Will the firm invest in the project if (a) there were no flotation costs (b) in the first scenario and (c) in the second scenario.? Credit will only be given if you provide numerical support for your answers.
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