Interstate Transport Has a Target Capital Structure of 50% Debt

question 3

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 1.34.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 6%.The firm should:

• A) Be indifferent between accepting or rejecting;the firm's required rate of return on the project equals its expected return.
• B) Accept the project;its return exceeds the risk-free rate and the before-tax cost of debt.
• C) Accept the project;its return is greater than the firm's required rate of return on the project of 12.62%.
• D) Reject the project;its return is less than the firm's required rate of return on the project of 16.9%.
• E) Reject the project;its return is only 13%.

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Definitions:

La Belle Indifference

Describes a paradoxical lack of concern or indifference towards one's significant physical or psychological symptoms.

Paralysis

The loss of the ability to move in one or more parts of the body, often as a result of damage to the nervous system.

Biological Cause

A factor related to biological or physiological processes that leads to a particular condition or characteristic.

Dissociative Amnesia

A disorder characterized by memory loss that is too extensive to be explained by ordinary forgetfulness, often related to traumatic events or stress.