Your Company Is Considering a Project That Will Cost $100

question 82

Multiple Choice

Your company is considering a project that will cost $100. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.70. The flotation cost for equity is 6 percent, the flotation cost for debt is 3 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the firm's flotation-adjusted cash flow in year 0?

• A) −$90.16
• B) −$104.06
• C) −$96.25
• D) −$102.72

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Definitions:

Capital

Refers to financial assets or the value of financial assets owned by a business or individual, including money, investments, and other tangible assets that can be used to create wealth.

Suburbanization

The process of population movement from within urban areas to the outskirts, leading to the expansion of suburban neighborhoods.

Oil Imports

The purchasing and bringing in of crude oil or refined petroleum products from other countries into one's own country.

Farm Subsidies

Financial assistance granted by the government to farmers that aims to supplement their income and manage the supply of agricultural commodities.