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Project Evaluation

Question 10: Locheed Tartan Corp. (LTC) is investigating a project that, in the absence of debt, will generate annual pretax cash flows of $5,500,000. LTC faces a tax rate of 34%. Its required return on unlevered equity for projects such as this is 9%, and its required return on debt is 8%. Suppose LTC will select a debt level and keep the dollar amount of debt constant in perpetuity. If the required investment for this project is $46,000,000, how much debt would the project need to support, in order that the project be worth doing?

a. The project has positive NPV even with no debt
b. $5,666,667
c. $15,111,111
d. $16,666,667
e. $44,444,444

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Question 10: Locheed Tartan Corp. (LTC) is investigating a project that, in the absence of debt, will generate annual pretax cash flows of $5,500,000. LTC faces a tax rate of 34%. Its required return on unlevered equity for projects such as this is 9%, and its required return on debt is 8%. ...

Solution Summary

Calculates the amount of debt that the project would need to support, in order that the project be worth doing.

$2.19