Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 8.5%. Arden’s marginal corporate tax rate is 37%, and its debt cost of capital is 4.8%.
a. Suppose Arden adjusts its debt continuously to maintain a constant debt-equity ratio of 0.5. What is the appropriate WACC for the new project?
b. Suppose Arden adjusts its debt once per year to maintain a constant debt-equity ratio of 0.5. What is the appropriate WACC for the new project now?
c. Suppose the project has free cash flows of $10.2 million per year, which are expected to decline by 2.2% per year. What is the value of the project in parts (a) and (b) now?
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