thquiz5 - total. The equity beta of the corporation is 1.2....

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Name TH QUIZ #5 You are the CFO of ICLITE Corporation and you have just received a memo from the CEO, asking you to give your recommendation on the following project: You will need to spend $1,000,000 to get the project up and running. Your team expects the project to generate after-tax cashflows of $267,500 per year, for 6 years. You will have to issue both debt and equity to finance the project. The corporation’s capital structure has a D/E ratio of 0.5, which you intend to keep for this project as well. The debt will consist of zero coupon bonds with $1,000 face value. They will mature in 6 years and are currently priced at $746.21. The flotation costs for debt will be $20,000
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Unformatted text preview: total. The equity beta of the corporation is 1.2. The T-bill rate is 4% and the S&P500 return is 12%. Your most recent dividend was $2.21. You expect a constant growth rate of 2% forever and the stock is currently trading at $27. The flotation costs for equity will be $80,000 total. The CEO believes this project falls under the Risky category and would like you to adjust the discount rate upward by adding 3% to the WACC. The tax rate is 35%. Is this a good project? Please support your answer with an NPV calculation....
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This note was uploaded on 10/12/2008 for the course BUAD 310 taught by Professor Lv during the Spring '07 term at USC.

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