Delta Mills and Franklin Mill Are Identical Firms Except for Their

question 78

Multiple Choice

Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $680,000 of equity.Franklin is a levered firm with $425,000 of equity and $255,000 of debt at an interest rate of 6.2 percent.Both Delta and Franklin have an expected EBIT of $84,000.Ignore taxes.Delta has a WACC of ________ percent and Franklin's WACC is ________ percent.

• A)12.35; 11.05
• B)12.35; 14.10
• C)12.35; 12.35
• D)14.10; 14.10
• E)16.10; 14.10

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Definitions:

NPV

Net Present Value, a calculation used to determine the present value of an investment's expected future cash flows compared to its initial cost.

Internal Rate

Refers to the internal rate of return (IRR), a financial metric used to estimate the profitability of potential investments.

Cash Flows

The entire sum of funds moving into and exiting a business, particularly impacting its liquidity and comprehensive financial well-being.

Payback Period

The length of time required to recover the cost of an investment, calculated by dividing the initial investment by the annual cash flow.