Use the information for the question(s) below.
Omicron Industries' Market Value Balance Sheet ($ millions) and Cost of Capital
Omicron Industries' New Project Free Cash Flows
Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt-to-equity ratio.
-The debt capacity for Omicron's new project in year 1 is closest to:
A) $38.75
B) $48.25
C) $50.25
D) $58.00

Question

Use the information for the question(s) below.
Omicron Industries' Market Value Balance Sheet ($ millions) and Cost of Capital
  Omicron Industries' New Project Free Cash Flows
  Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt-to-equity ratio.
-The debt capacity for Omicron's new project in year 1 is closest to:
A) $38.75 
B) $48.25 
C) $50.25 
D) $58.00

Quizplus · Accepted Answer

A) r_wacc = 11ea7e5a_6edc_5081_9a0a_753253b2f8ef_TB1623_11 r_E + 11ea7e5a_6edc_7792_9a0a_c16c816e2815_TB1623_11 r_D(1 - τ_c), where D = net debt = Debt - Cash r_wacc = 11ea7e5a_6edc_7793_9a0a_e5b5ce77bc6f_TB1623_11 (.12) + 11ea7e5a_6edc_7794_9a0a_336577d4ee61_TB1623_11 (.06)(1 - .35) = .0876 11ea7e5a_6edc_7795_9a0a_b1dd2fff64ab_TB1623_11 = 11ea7e5a_6edc_9ea6_9a0a_81eecdf68945_TB1623_11 + 11ea7e5a_6edc_9ea7_9a0a_9d4fe9757e8a_TB1623_11 = $96.70 D₁ = d × 11ea7e5a_6edc_9ea8_9a0a_e7aaf6e2d10a_TB1623_11 D₁ = 11ea7e5a_6edc_c5b9_9a0a_25d3f1c026d6_TB1623_11 ($96.70) = $38.68

Use the Information for the Question(s) Below