If Equity Investors Require a 20% Rate of Return, What

question 55

Multiple Choice

If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project with $2 million annual cash flows before tax and interest, $3 million in debt with a 10% coupon, and a 35% tax rate?

• A) $5.53 million
• B) $5.87 million
• C) $8.5 million
• D)$9.03 million

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Definitions:

Opening Stance

The initial position or attitude taken by a party at the beginning of a negotiation or discussion.

Counteroffer

A proposal made in response to an initial offer, suggesting different terms or conditions.

Resistance Point

The minimum or maximum point beyond which a party will not go in a negotiation; also known as walk-away point.

Basic Strategy

A fundamental plan or set of actions designed to achieve a long-term goal or overall aim.