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Cash flow to equity, project NPV

Question 18
Greta's Gaskets is considering investment in a new production facility. Initial investment would be $60 million, financed by $35 million of equity and $25 million of debt. The firm will maintain a constant leverage ratio over time. The expected return on levered equity for this project is 9.5%, while the expected return on debt is 6.5%. The project will generate pre-tax cash flows each year of $10 million, and the tax rate is 34%. The cash flow to equity each year is __________, and the project NPV is __________.

a.$4.98 million, $17.37 million
b.$5.53 million, -$1.82 million
c.$5.53 million, $23.18 million
d.$7.15 million, $37.59 million
e.$7.15 million, $40.29 million

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Question 18
Greta's Gaskets is considering investment in a new production facility. Initial investment would be $60 million, financed by $35 million of equity and $25 million of debt. The firm will maintain a constant leverage ratio over time. The expected return on levered equity for this project is 9.5%, ...

Solution Summary

Calculates cash flow to equity and project NPV.

$2.19