If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project with $2 million annual cash flows before tax and interest, $3 million in debt with a 10% coupon, and a 35% tax rate?

A. $5.53 million

B. $5.87 million

C. $8.5 million

D. $9.03 million

Expert Solution

If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project with $2 million annual cash flows before tax and interest, $3 million in debt with a 10% coupon, and a 35% tax rate?

A. $5.53 million

Cash flows before tax & interest = 2.0 million

- interest payment = 0.3 million

pretax cash flow = 1.7 million

taxes = 1.7 * .35 = .595 million

after tax cash flow = 1.105 million

max equity financing =

1.105 / .20 = $5.525 million

The maximum acceptable amount of equity financing is $5.53 million.

Renze Joy Candido answered 2 years ago

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Question

If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project with $2 million annual cash flows before tax and interest, $3 million in debt with a 10% coupon, and a 35% tax rate?

Solutions

Expert Solution

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