Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2?

Question

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions:  The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2?

Quizplus · Accepted Answer

To find the levered after-tax incremental cash flow for year 2, we need to start by calculating the incremental after-tax cash flow for year 2:

Incremental after-tax cash flow for year 2 = Year 2 cash flow - Year 1 cash flow

= $344,000,000 - $184,000,000

= $160,000,000

Next, we need to calculate the levered after-tax cost of capital (LACC):

LACC = (1 - tax rate) * (cost of equity * (equity / total capital)) + (cost of debt * (debt / total capital))

= (1 - 0.34) * (0.1 * (1/3)) + (0.08 * (2/3))

= 0.0872 or 8.72%

Finally, we can use the levered after-tax incremental cash flow formula to calculate the levered after-tax incremental cash flow for year 2:

Levered after-tax incremental cash flow for year 2 = Incremental after-tax cash flow for year 2 * (1 - tax rate) / LACC

= $160,000,000 * (1 - 0.34) / 0.0872

= $215,152,000

Therefore, the best choice is B.

Consider a Project of the Cornell Haul Moving Company,the Timing