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1) Which of the given would lead to the rise in leverage in the firm's optimal capital structure according to agency cost/tax shield trade-off model?

a) A decline in corporate tax rate

b) The raise in agency costs of outside equity

c) The increase in indirect bankruptcy costs

d) The increase in agency costs of outside debt

e) All of the above

2) Cactus Cushions, non-traditional pillow manufacturer, is considering the new capital investment project which needs a $40 million investment today. Next year, project will make expected pre-tax cash flows of= $2 million, all of which are taxable. Following year, expected cash flows will rise by 2.5%, and constant annual growth will continue everlastingly. Suppose that project will forever be backed by debt equal to= 60% of contemporaneous project value. Tax rate is=34%, debt will have required return= 6%, and equity will have required return= 9%. Compute project NPV according to WACC method?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M915118

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