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
Related questions
Question
(a) If Roxy Inc. were to be 100% equity financed, what would be a reasonable estimate of the expected return on Roxy's equity? What is Roxy's WACC? expected
Transcribed Image Text:Your friend is looking to launch a new hotel chain, Roxy Inc., designed to serve the traveling
needs of the budget-minded millennial traveler.
To launch Roxy Inc., she is expected to invest $500 million this year (year=0). The hotel chain
is expected to generate free cash flows of $27 million per year, starting in year 1. Thereafter,
these free cash-flows are expected to grow at 3 percent per year in perpetuity. For simplicity,
assume these cash-flows are received at the end of each year.
Your friend knows you've been taking this class, so she asked you to assess the potential value
of the new hotel chain. To help you, she gives you the following reports for a handful of
publicly-traded firms, as well as the expected returns on the government bond (Treasury),
and the risk premium on the value-weighted market portfolio:
Market
Value
Equity
900
Company
Dropbox
Ikea
Intercontinental Hotels Group
10-year Treasury rate
Expected Market Risk Premium
1,000
7,500
2.0%
5.0%
Market
of Value
Debt
150
100
2,500
of Equity
Beta
2
2.3
1.6
Assume throughout that the CAPM holds for all assets, and that the debt of Dropbox, Ikea,
and Intercontinental Hotel Group is risk-free. None of these firms hold (excess) cash assets.
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