If Equity Investors Require a 20% Rate of Return,what Is

question 61

Multiple Choice

If equity investors require a 20% rate of return,what is the maximum acceptable amount of equity financing for a project with cash flows of $2 million a year in perpetuity before tax and interest? The project supports debt of $3 million with a 10% coupon,and the tax rate is 35%.

• A) $5.53 million
• B) $5.87 million
• C) $8.5 million
• D) $9.03 million

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Definitions:

Marginal Revenue

The additional income derived from the sale of one more unit of a good or service.

Monopsonist Purchase

The buying activities of a market condition where only one buyer exists, affecting prices and quantities of goods.

Profit Maximizing

The process of adjusting production and sale volumes to achieve the highest possible profit, under given market conditions and constraints.

Marginal Value Curve

A graphical representation that shows how the value (or utility) of consuming an additional unit of a good or service changes as consumption increases.