Your Company Is Considering a Project That Will Cost $175

question 94

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 percent and the firm's D/A ratio is 0.62. The flotation cost for equity is 5 percent, the flotation cost for debt is 3 percent, 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:

Dividend

A distribution of a portion of a company's earnings decided by the board of directors to its shareholders.

Risk Aversion

A preference for avoiding risk, where individuals or entities prioritize certainty and are reluctant to engage in investments with uncertainty.

Expected Return

The anticipated value or profit from an investment over a given period of time.

Beta

Beta is a measure of a stock's volatility in relation to the overall market, indicating the level of risk associated with the stock’s price changes.