OK, Inc Uses One-Third Debt and Two-Thirds Common Stock to Finance

question 142

Multiple Choice

O.K., Inc. uses one-third debt and two-thirds common stock to finance its operations. The after-tax cost of debt is 4.5 % and the cost of equity is 9 %. The management of O.K., Inc. is considering a small project that they consider to be equally as risky as the overall firm. The project has an initial cash outlay of $10,000. The project is expected to have a single cash inflow of $17,500 at the end of two years. What is the projected net present value of this project?

• A) $5,040.41
• B) $5,143.32
• C) $5,707.07
• D) $6,025.27
• E) $6,279.07

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Definitions:

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Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

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