Your Company Is Considering a Project That Will Cost $175

question 16

Multiple Choice

Your company is considering a project that will cost $175. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10% and the firm's D/A ratio is .62. The flotation cost for equity is 5%, the flotation cost for debt is 3%, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the firm's flotation-adjusted cash flow in year 0?

• A) -$90.26
• B) -$88.14
• C) -$196.25
• D) -$181.84

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Definitions:

Credit Terms

The conditions under which credit will be extended to a customer, including the repayment time frame and any interest or discounts.

Net Allowance

The remaining balance after adjustments are made for discounts, returns, or bad debts to the gross receivables or revenue.

Sales Discounts

A reduction in the price of goods or services sold, offered by the seller as an incentive for early payment or in bulk purchase scenarios.

Sales

The total revenue earned from the selling of goods or services, before any deductions are made.