Question

The manager of Joytechs is considering investing in a new project based on the following information....

The manager of Joytechs is considering investing in a new project based on the following information.

Joytechs' Market Value Balance Sheet ($ Millions) and Cost of Capital

Assets

Liabilities

Cost of Capital

Cash

0

Debt

300

Debt

6%

Other Assets

500

Equity

200

Equity

12%

Tax rate (τc)

31%

Joytechs' New Project Free Cash Flows (Millions)

Year

0

1

2

3

Free Cash Flows

($120)

$60

$80

$70

The manager assumes that this new project is of average risk for Joytechs and that the firm wants to hold constant its debt to equity ratio.

The debt capacity for Joytechs' new project in year 1 is closest to:

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