Consider a project of the Cornell Haul Moving Company, the timing and size of th
ID: 2814007 • Letter: C
Question
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required return would be 10 percent.
Part 1. What is the levered after-tax incremental cash flow for year 4?
Multiple Choice
A. $281,704,000
B. $465,152,000
C. $194,848,000
D. $460,796,000
Part 2. What is the levered after-tax incremental cash flow for year 2?
Multiple Choice
A. $185,796,000
B. $215,152,000
C. $267,952,000
D. $284,848,000
Explanation / Answer
Answer is D. $460,796,000
Total Debt =990*3/4=742.5
After tax Interest =742.5*(1-.34)
after-tax incremental cash flow =500-742.5*(1-.34)=460.796
Part 2
A. $185,796,000
Total Debt =990*3/4=742.5
After tax Interest =742.5*(1-.34)
after-tax incremental cash flow =500-742.5*8%*(1-.34)=185.796
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