Interstate Transport Has a Target Capital Structure of 50% Debt

question 2

Multiple Choice

Interstate Transport has a target capital structure of 50% debt and 50% common equity.The firm is considering a new independent project that has a return of 13% and is not related to transportation.However,a pure-play proxy firm has been identified that has a beta of 1.38.Both firms have a marginal tax rate of 40%,and Interstate's before-tax cost of debt is 12%.The risk-free rate is 10% and the market risk premium is 5%.The firm should:

• A)Reject the project; its return is less than the firm's required rate of return on the project of 16.9%.
• B)Accept the project; its return is greater than the firm's required rate of return on the project of 12.05%.
• C)Reject the project; its return is only 13%.
• D)Accept the project; its return exceeds the risk-free rate and the before-tax cost of debt.
• E)Be indifferent between accepting or rejecting; the firm's required rate of return on the project equals its expected return.

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Definitions:

Third-Party Involvement

The participation or intervention of an entity not directly involved in a matter to facilitate resolution or decision-making.

Formal Power

Authority granted through official or structured positions within organizations or institutions.

Mediators

Neutral third parties who assist in negotiating agreements between disputing parties by facilitating communication and proposing solutions.

Mediation Effectiveness

Measures how efficiently and beneficially a mediation process resolves a conflict, gauging the satisfaction of the parties involved.