A fiRm Is Considering a Project That Will Generate Perpetual

question 192

Multiple Choice

A firm is considering a project that will generate perpetual cash flows of $15,000 per year beginning next year. The project has the same risk as the firm's overall operations and must be
financed externally. Equity costs 14% and debt costs 4% on an after-tax basis. The firm's D/E ratio is
0) 8. What is the most the firm can pay for the project and still earn its required return?

• A) $138,000
• B) $157,000
• C) $164,000
• D) $182,000
• E) $199,000

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Definitions:

Minimum Value

The smallest number in a data set.

Significance

Significance refers to the measure of whether the results of a study or experiment are likely not due to chance, as determined by a set threshold of probability (p-value).

Alpha (α)

The threshold of significance in a statistical test; the probability of rejecting the null hypothesis when it is true, often set at 0.05 or 5%.

Population Parameter

A value that represents a characteristic of an entire population, such as its mean or standard deviation.