Florida Corp

question 6

Multiple Choice

Florida Corp.is calculating the appropriate rate for discounting cash flows on a project valued using the APV method.Florida's target debt ratio (D/(D+E) ) in market value terms is 50%,and the yield-to-maturity on its outstanding debt is 6%.A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E) ) of 40%.Assume a risk-free rate of 5% and a market risk premium of 8%.Florida's tax rate is 40%.What discount rate should Florida use?

• A) 7.66%
• B) 11.02%
• C) 11.72%
• D) 18.44%

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Definitions:

Double Taxation

A situation where the same income is taxed twice, typically once at the corporate level and again when distributed to shareholders as dividends.

Company Management

The group of individuals responsible for making major decisions, overseeing operations, and managing the resources and strategy of a company.

Capital Budgeting

The process by which a business evaluates and selects long-term investments based on their potential to generate future profit.

Long-Term Investments

Long-term investments are financial assets intended to be held for a period longer than one year, aiming for higher returns over time.