Omani corporation is currently financed with 25% debt that could be borrowed at an interest rate of 10% and 75% equity. Management of a company is considering increasing its level of debt until 50% at the same interest to finance a new project with cost OMR (12) thousand. The new project will generate a cash flow that is mentioned in the below table. You are the financial manager of the company; hold other things are fixed, do you will recommend to increasing the level of debt up to 50% for the following aspects: - In the field of the level of cost of capital (WACC) and why? In the field of evaluating the new project, and why?
Omani corporation is currently financed with 25% debt that could be borrowed at an interest rate of 10% and 75% equity. Management of a company is considering increasing its level of debt until 50% at the same interest to finance a new project with cost OMR (12) thousand. The new project will generate a cash flow that is mentioned in the below table.
You are the
- In the field of the level of cost of capital (WACC) and why?
- In the field of evaluating the new project, and why?
|
Data is regarding the current position of the company |
||||||||||
|
Market risk premium of stock |
4% |
|||||||||
|
Income Tax Rate |
40% |
|||||||||
|
Risk-Free |
6% |
|||||||||
|
Data is regarding the cash flow of project.
|
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
