Your Firm Has an Average-Risk Project Under Consideration A)About 16

question 28

Multiple Choice

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 11.00%,the cost of preferred stock is 12.00%,the cost of common stock is 17.00%,and the WACC adjusted for taxes is 15.00%,what is the IRR of the project,given the expected cash flows listed here? Use a financial calculator to determine your answer. $$\begin{array} { | l | c | c | c | c | } \hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \\\hline \text { Investment } & - \$ 2,000,000 & & & \\\hline \text { NWC } & - \$ 350,000 & & & \$ 350,000 \\\hline \text { Operating Cash Flow } & & \$ 950,000 & \$ 950,000 & \$ 950,000 \\\hline \text { Salvage } & & & & \$ 50,000 \\\hline \text { Total Incremental Cash Flow } & - \$ 2,350,000 & \$ 950,000 & \$ 950,000 & \$ 1,350,000 \\\hline\end{array}$$

• A)About 16.97%
• B)About 12.02%
• C)About 11.16%
• D)About 8.94%

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Definitions:

Volatile Markets

Financial markets that are characterized by rapid and significant changes in prices.

Rebalancing

Realigning the proportions of assets in a portfolio as needed.

In-the-money

A term used in options trading to indicate that an option has intrinsic value, meaning it is profitable to exercise.

Intrinsic Value

The actual, fundamental value of an asset, based on underlying perceptions of its true value including all aspects of the business, in terms of both tangible and intangible factors.