A Firm Has a Debt-To-Value Ratio of 40%,a Cost of Equity

question 86

Multiple Choice

A firm has a debt-to-value ratio of 40%,a cost of equity of 14%,and an after-tax cost of debt of 5.5%.It plans to launch a new product that will produce cash flows of $398,000 next year and $211,000 in year 2.If this project is about as risky as the firm's existing assets,what is the present value of the project?

• A) $458,008
• B) $481,707
• C) $500,614
• D) $532,349

---

Definitions:

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, leading to a decrease in purchasing power.

Period

A length of time during which a series of events or an action takes place or completes.

Disinflation

The process of slowing down the rate of inflation, resulting in a decrease in the general price levels of goods and services over time.

Inflation

The frequency at which the overall pricing of goods and services heightens, eroding the ability to buy.