Question
You are valuing a project involving operations similar (risk-wise) to those of a publicly traded comparable firm. Your project involves an initial investment of $100
You are valuing a project involving operations similar (risk-wise) to those of a publicly traded comparable firm. Your project involves an initial investment of $100 million. It will generate pre-tax cash flows of $12 million each year forever. The corporate tax rate is 34%. Suppose that the comparable firm rebalances its capital structure continuously and maintains a 28% debt, 72% equity ratio. The comparables required return on debt is 6%, and its required return on equity is 9.5%. The risk-free rate is 5%. Suppose that your project will support a constant $25 million of debt (market and face value) in perpetuity and that the debt level will not change if firm value changes. Is the project worth doing? By how much?
Edit: this question was flagged as needing more information. This is the entire question from my practice problem in the class. There is no additional information from my professor. The question is a direct copy and paste, so I'm assuming all the information needed in order to solve is in the problem.
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