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2) KAYNE Inc. is considering a new project that costs $50 million. The project will generate...


2) KAYNE Inc. is considering a new project that costs $50 million. The project will generate after-tax (year-end) cash flows of $10 million for the first three years (t = 1, 2, 3), $13 million for the following two years (t = 4, 5), and $12.5 million for the last three years (t= 6, 7, 8). The firm has a debt-equity ratio of 0.50. This firm has a beta of 1.8 and its cost of debt is 10 percent. Suppose the risk-free rate and market return are 3.5% and 9%, respectively. The corporate tax rate is 35 percent. It appears that the project has the same risk as that of the overall firm. Should KAYNE Inc. take on the project? Explain why KAYNE should or should not take the project.

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