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The Rice Solar Corp. has a new investment opportunity that generates expected cash flows of $100 million per year (end of year) forever. The managers of Rice Solar are not sure what the required rate of return for the project should be, so they examine A&M Solar Inc. whose main business is very similar to the new project Rice Solar is evaluating. The expected return of the market portfolio is 7%, and the annual risk-free rate is 4%. The volatility of the market portfolio is 20%, and the covariance between the market portfolio and A&M Solar Inc. is 0.15. Assume that tax rates are equal to zero; A&M Solar and Rice Solar have no debt.
a. What is the β of the assets of A&M Solar Inc.?
b. What is the expected return of A&M Solar Inc.?
c. What is the present value of the cash flows of the new investment opportunity of Rice Solar Corp?
d. If the project requires an investment of $900 million, should Rice Solar go ahead with it? Why?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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