Suppose That to Fund This New Project,Aardvark Borrows $120 Million

question 56

Multiple Choice

Suppose that to fund this new project,Aardvark borrows $120 million with the principal to be paid in three equal installments at the end each year.The present value of Aardvark's interest tax shield is closest to:

• A) $5.15
• B) $5.00
• C) $5.90
• D) $5.25

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Definitions:

Debt Flotation Costs

Fees and expenses incurred by an issuer of debt when offering new securities to investors.

Capital Structure

The mix of various forms of capital used by a company, including debt and equity, to finance its operations.

Equity

Represents the value that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debts were paid off.

Refunding Investment Outlay

The process of reallocating or investing capital in new assets or projects with the intention of generating returns or benefits that exceed the initial costs.