A Levered Firm Has a Target Capital Structure of 30

question 33

Multiple Choice

A levered firm has a target capital structure of 30 percent debt and 70 percent equity.The aftertax cost of debt is 5.1 percent,the tax rate is 35 percent,and the cost of equity is 13.1 percent.The firm is considering a project that is equally as risky as the overall firm.The project has an initial cash outflow of $1.2 million and annual cash inflows of $516,000 at the end of each year for 3 years.What is the NPV of the project?

• A)$60,174.68
• B)$69,856.82
• C)$67,565.33
• D)$64,001.03
• E)$93,322.15

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Definitions:

Transfer Price

The price charged for goods or services transferred between departments or divisions within the same company.

Variable Cost

A cost that varies directly with the level of output or production, such as raw materials or direct labor costs.

Division Delta

A specific division, unit, or segment within a larger organization, identified by the designation "Delta."

Transfer Price

The price at which goods and services are transferred between departments or divisions within the same company or between affiliated entities.