Asked by
Maham Sundas
on Dec 09, 2024
Verified
Douglass Enterprises has a capital structure which is based on 40 % debt, 10 % preferred stock, and 50 % common stock. The after-tax cost of debt is 6 %, the cost of preferred is 7 %, and the cost of common stock is 9 %. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $125,000 and cash inflows of $76,000 a year for two years. What is the projected net present value of this project?
A) $11,275.07
B) $11,398.16
C) $11,403.03
D) $11,006.18
E) $11,783.43
Capital Structure
The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, which reflects how it finances its overall operations and growth.
After-Tax Cost
The actual cost of an expenditure after accounting for the effects of taxation on the expense.
Net Present Value
A method used in capital budgeting to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and the present value of cash outflows.
- Gauge the Net Present Value (NPV) of a project and apprehend its necessity in project analysis.
- Implement the utilization of cost of capital considerations, with an emphasis on the weighted average cost of capital (WACC), in the examination of projects.
Verified Answer
KJ
Learning Objectives
- Gauge the Net Present Value (NPV) of a project and apprehend its necessity in project analysis.
- Implement the utilization of cost of capital considerations, with an emphasis on the weighted average cost of capital (WACC), in the examination of projects.