Use the following information to answer the question(s)below.
Wyatt Oil is considering an investment in a new project with an unlevered cost of capital of 11%.Wyatt's corporate tax rate is 21% and its debt cost of capital is 6%.The project has free cash flows of $25 million per year which are expected to decline by 3% per year.
-If Wyatt adjusts its debt continuously to maintain a constant debt-equity ratio of 50%,then the value of this new project is closest to:
A)$184 million.
B)$188.5 million.
C)$320 million.
D)$340 million.

Question

Quizplus · Accepted Answer

The correct answer is A because the value of the project is closest to $184 million. The unlevered cost of capital is 11%, the corporate tax rate is 21%, and the debt cost of capital is 6%. The project has free cash flows of $25 million per year which are expected to decline by 3% per year. If Wyatt adjusts its debt continuously to maintain a constant debt-equity ratio of 50%, then the value of this new project is closest to $184 million.

Use the Following Information to Answer the Question(s)below