his project will require $14 million initial investment and is expected to generate volatile cash flow during the first three years. It is expected to generate volatile cash flow the three first years. Cash grow is expected to grow at a constant rate of 3% per year after year four . The company's current balance sheet is $2 billion debt in book value and the debt is trading at 80% of book value. The debt beta is 0.6 the market value of equity of the company is 4.8 billion and the equity beta is 1.75. It has been stable and the company will issue ten million new debt at the current borrowing cost to take the new investment project. The company plans to gradually reduce borrowing in the first 3 years and then return to its previous stable capital structure. Debt repayment schedule is given below. Assume the corporate tax rate is 21%. Suppose the risk free rate is 2% and the market risk return is 10%. The underwritten charges of 1.5% of the debt issue as their total commission. One through three years after tax cash flow estimated are given     Cashflow forecast in $M            0                  1                    2                     3 After tax cash flow                     -14.0           2.0                3.0                3.7 Debt Balance  at yr end ($M)      10.0          9.0                8.5                 6.5 What is the unlevered beta of the company and the return on assets? Calculate the levered cost of capital (return on equity) and after-tax WACC for peri with stable capital structure.

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
icon
Related questions
Question

This project will require $14 million initial investment and is expected to generate volatile cash flow during the first three years. It is expected to generate volatile cash flow the three first years. Cash grow is expected to grow at a constant rate of 3% per year after year four . The company's current balance sheet is $2 billion debt in book value and the debt is trading at 80% of book value. The debt beta is 0.6 the market value of equity of the company is 4.8 billion and the equity beta is 1.75. It has been stable and the company will issue ten million new debt at the current borrowing cost to take the new investment project. The company plans to gradually reduce borrowing in the first 3 years and then return to its previous stable capital structure. Debt repayment schedule is given below. Assume the corporate tax rate is 21%. Suppose the risk free rate is 2% and the market risk return is 10%. The underwritten charges of 1.5% of the debt issue as their total commission. One through three years after tax cash flow estimated are given

 

 

Cashflow forecast in $M            0                  1                    2                     3

After tax cash flow                     -14.0           2.0                3.0                3.7

Debt Balance  at yr end ($M)      10.0          9.0                8.5                 6.5

What is the unlevered beta of the company and the return on assets?

  1. Calculate the levered cost of capital (return on equity) and after-tax WACC for peri with stable capital structure. 
Expert Solution
steps

Step by step

Solved in 3 steps with 1 images

Blurred answer
Knowledge Booster
Risk and Return
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education