BASF will invest $14 million this year to upgrade its ethylene glycol processes. This chemical is used to produce polyester resins to manufacture products varying from construction materials to aircraft, and from luggage to home appliances. Equity capital costs 14.5% per year and will supply 65% of the capital funds. Debt capital costs 10% per year before taxes. The effective tax rate for BASF is 36%. (a) Determine the amount of annual revenue after taxes that is consumed in covering the interest on the project’s initial cost. (b) If the corporation does not want to use 65% of its own funds, the financing plan may include 75% debt capital. Determine the amount of annual revenue needed to cover the interest with this plan, and explain the effect it may have on the corporation’s ability to borrow in the future.
BASF will invest $14 million this year to upgrade
its ethylene glycol processes. This chemical is
used to produce polyester resins to manufacture
products varying from construction materials to
aircraft, and from luggage to home appliances.
Equity capital costs 14.5% per year and will supply
65% of the capital funds. Debt capital costs 10% per year before taxes. The effective tax rate for
BASF is 36%.
(a) Determine the amount of annual revenue
after taxes that is consumed in covering the
interest on the project’s initial cost.
(b) If the corporation does not want to use 65% of
its own funds, the financing plan may include
75% debt capital. Determine the amount of annual
revenue needed to cover the interest with
this plan, and explain the effect it may have on
the corporation’s ability to borrow in the future.
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