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6. NEC Inc is considering a $50 million project in...




6. NEC Inc is considering a $50 million project in its power system division. Tom Edison, the company?s chief financial officer, has evaluated the project and determined that the project?s unlevered cash flow will be $3.5 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: issuing 10-year bonds or issuing common stock. NEC?s pre-tax cost of debt is 7.3 percent, and its cost of equity is 10.9 percent. The company?s target debt-to value ratio is 80 percent. The project has the same risk as NEC?s existing business. NEC is in the 34 percent tax bracket. Should NEC accept the project?


Paper#13704 | Written in 18-Jul-2015

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