Case 2: Cost of capital. a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, an which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you estimate the equity risk premium to be 6% What is Bellevue Warc? b. Suppose that Bellevue ints to expand its activity by taking over a restaurant company. You find three compa in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange, so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the same capital structure of its main hotel business (ie =40%). Assuming that the corporate tax is 25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should use for analyzing its planned investment in the restaurant industry. \table[[Company, Equity beta, Debt/ equity Ratic, Debt betal, Eatout. 1.13, 0.15,0.00), Goodfood, 1.80, 1.06, 0.15], [Dinein, 3.27, 3.52,0.30]
Case 2: Cost of capital. a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, an which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you estimate the equity risk premium to be 6% What is Bellevue Warc? b. Suppose that Bellevue ints to expand its activity by taking over a restaurant company. You find three compa in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange, so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the same capital structure of its main hotel business (ie =40%). Assuming that the corporate tax is 25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should use for analyzing its planned investment in the restaurant industry. \table[[Company, Equity beta, Debt/ equity Ratic, Debt betal, Eatout. 1.13, 0.15,0.00), Goodfood, 1.80, 1.06, 0.15], [Dinein, 3.27, 3.52,0.30]
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Case 2: Cost of capital. a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, an which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you estimate the equity risk premium to be 6% What is Bellevue Warc? b. Suppose that Bellevue ints to expand its activity by taking over a restaurant company. You find three compa in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange, so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the same capital structure of its main hotel business (ie =40%). Assuming that the corporate tax is 25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should use for analyzing its planned investment in the restaurant industry. \table[[Company, Equity beta, Debt/ equity Ratic, Debt betal, Eatout. 1.13, 0.15,0.00), Goodfood, 1.80, 1.06, 0.15], [Dinein, 3.27, 3.52,0.30]
Transcribed Image Text:Case 2: Cost of capital.
a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, on
which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the
company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you
estimate the equity risk premium to be 6%. What is Bellevue Wacc?
b. Suppose that Bellevue wants to expand its activity by taking over a restaurant company. You find three
companies in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange,
so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the
same capital structure of its main hotel business (i.e.: D/EV=40%). Assuming that the corporate tax is
25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should
use for analyzing its planned investment in the restaurant industry.
Equity beta
Debt/equity Ratio
Company
Eatout
Goodfood
Dinein
1.13
1.80
3.27
0.15
1.06
3.52
Debt beta
0.00
0.15
0.30
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