Homework answers / question archive / Assume the following investment opportunity

Assume the following investment opportunity

Finance

Share With

Assume the following investment opportunity. The company has constant leverage (debt to assets) of 50%, the cost of equity is 20%, and the cost of debt is 7.5%. The corporate tax rate is 25%. Investment takes place today, that is at year 0, and equals 30. The firm has hired a group of consultants which prepared the projections in the table below. The costs of their services are 4 and will be paid next year. Assume there are no changes in working capital.

Year   1   2   3   4   5
EBIT   10   12   14   16   18
Interests   0.5   0.5   1   1   1.5
Depreciation   2.5   2.5   2.5   2.5   2.5

What are the free cash flows for year 1?

Select one:
a. 6.00
b. 5.00
c. 0.50
d. 10.00