Consider the following projects. Project C0 C1 C2 C3 C4 C5 C6 A -2,000 +1,000 0 0 0 0 +2,000 B -3,000 +1,000 +1,000 +4,000 +1,000 +1,000 +2,000 C -4,000 +1,000 +1,000 0 +1,000 +1,000 +2,000 Assume that this firm’s beta= 1.3 The expected market return is 12%. The risk free rate is 2.5%. This company can borrow debt at 7.5%. The firm has $5 billion in debt. It has 6 billion shares outstanding at $5 price/shr. The corporate tax rate (Tc) = 21%
Consider the following projects. Project C0 C1 C2 C3 C4 C5 C6 A -2,000 +1,000 0 0 0 0 +2,000 B -3,000 +1,000 +1,000 +4,000 +1,000 +1,000 +2,000 C -4,000 +1,000 +1,000 0 +1,000 +1,000 +2,000 Assume that this firm’s beta= 1.3 The expected market return is 12%. The risk free rate is 2.5%. This company can borrow debt at 7.5%. The firm has $5 billion in debt. It has 6 billion shares outstanding at $5 price/shr. The corporate tax rate (Tc) = 21%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Consider the following projects.
| Project | C0 | C1 | C2 | C3 | C4 | C5 | C6 |
|---|---|---|---|---|---|---|---|
| A | -2,000 | +1,000 | 0 | 0 | 0 | 0 | +2,000 |
| B | -3,000 | +1,000 | +1,000 | +4,000 | +1,000 | +1,000 | +2,000 |
| C | -4,000 | +1,000 | +1,000 | 0 | +1,000 | +1,000 | +2,000 |
Assume that this firm’s beta= 1.3 The expected market return is 12%.
The risk free rate is 2.5%. This company can borrow debt at 7.5%.
The firm has $5 billion in debt. It has 6 billion shares outstanding at $5 price/shr.
The corporate tax rate (Tc) = 21%
Question: What is the NPV of project B ?
Multiple Choice
-
The NPV for project B is $4,377
-
The NPV for project B is $3,448
-
The NPV for project B is $3,940
-
The NPV for project B is $4,073
-
The NPV for project B is 3,855
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