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What is the present value of new project

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Reference no: EM133121269

Eastern Oil is considering an investment in a new project with an unlevered cost of capital of 11%. Wyatt's marginal corporate tax rate is 35% and its debt cost of capital is 6%. The project has free cash flows of $25 million per year which are expected to decline by 3% per year.

a) If Eastern adjusts its debt continuously to maintain a constant debt-equity ratio of 50%, then what is the present value of this new project?

b) Suppose instead that Eastern adjusts its debt once per year to maintain a constant debt-equity ratio of 50%, what is the present value of the new project in this case?

Reference no: EM133121269

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