Pataty Patata Company Is Considering a Project That Costs $1

question 43

Essay

Pataty Patata Company is considering a project that costs $1 million.The project will generate constant perpetual earnings.The firm has just paid a common share dividend of $5 and dividends are expected to be constant for the foreseeable future.The current value of one common share is $25.The firm has 100,000 common shares outstanding.
The firm also has perpetual debt with a market value of $3 million and annual coupon payments of $300,000.
The firm has an income tax rate of 35%.The firm will not need to issue new securities to finance the project.Determine the minimum annual cash flows that must be generated by the project in order for the project to be undertaken.Demonstrate that the project will satisfy the requirements of the capital providers.