Estimate the cost of capital for the project

Reference no: EM13264517

Your company is considering a project (expanding its household product division). Your company is a private company and there are no securities issued and traded in public financial markets. Assume that the project will be 100% equity financed. The initial investment would be 10 million and free cash flows (FCF) for next four years are estimated. Tax rate is 40%.

FCF at t=1: 3 million
FCF at t=2: 4 million
FCF at t=3: 4 million
FCF at t=4: 6 million

You need to estimate the cost of capital for the project and perform a NPV analysis to evaluate this project. You have the following information.

You found a comparable company in the same line of business, which is also 100% equity financed. Risk free rate = 3%, market risk premium = 5%, and estimated beta of this comparable company is 0.83
(You found a comparable company in the same line of business, but the comparable company has a debt (30% of leverage ratio). Cost of equity = 6% and cost of debt is 4%

Reference no: EM13264517

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