Question

Your company is preparing to invest in a new project with capital expenses estimated at $226k. Finance is available at 4.2% pa interest with the full amount borrowed to be paid back over 7 years. The company could to finance up to 75% of the project using debt at the terms available, but decides to fund it using equity. What are the annual repayments to the nearest thousand dollars? Select the correct answer (in $k).

Answer 1

The company's decision to fund the new project using equity means there are no annual repayments similar to a debt agreement. Instead, returns to investors must come from project profits. This choice directly impacts the company's capital structure and cost of capital.

Step-by-step explanation:

The question pertains to the calculation of annual repayments for a new project with capital expenses estimated at $226k funded entirely by equity. Since the entire amount is funded using equity, there is no borrowed finance to pay back, and no annual repayments are required in the form of principal plus interest, common in debt financing. However, investors may expect some form of return on equity, which could come from the profits generated by the project.

In the context of the question and provided reference materials, it's pertinent to note that firms can raise the financial capital they need through various means, including issuing bonds, reinvesting profits, borrowing from banks or bonds, or selling stock, as mentioned in the given information. The choice between debt and equity has implications for the firm's capital structure and the cost of capital.