Interstate Transport Has a Target Capital Structure of 50% Debt

question 1

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 14% 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 25%,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) 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 12.95%.
• 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 14%.

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Definitions:

Imports

Goods and services brought into one country from another for sale, which can impact a nation’s economy by influencing the balance of trade.

Exports

The selling of goods and services produced in one country to another country.

Bretton Woods System

A monetary management system that established the rules for commercial and financial relations among major industrial states after World War II, introducing fixed exchange rates and laying the foundation for modern international monetary systems.

Trade Surplus

Occurs when the value of a country's exports exceeds the value of its imports.