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Company A saved 1Billion dollars of internal cash in 2001 and 2002. Their debt to...

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Finance

  1. Company A saved 1Billion dollars of internal cash in 2001 and 2002. Their debt to value ratio is around 40% in both 2001 and 2002. In order to finance a project in 2003, which costs 3 billion dollars, the company used 1billion dollar internal cash. The company had 3 billion dollars of internal cash before the project. The companys cost of debt is the same as the cost of using internal cash. The market value of the company at the end of 2003 is 150 Billion dollars and the market value of equity is 90 billion dollars.

If you were told that the company is following pecking order theory, how would you evaluate the companys decision in financing the new project?

If you were told that the company is following trade-off theory, how would you evaluate the companys decision in financing the new project?

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