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Problem 1: A large oil and gas company is considering making a $100M investment in a new renewable energy project. Assume that it will finance 60% of this investment with off-balance sheet financing at a debt cost of 5% (beta of debt is 0.3). The project is expected to generate project free cash flows of $10M each year (assume into perpetuity) and an unlevered beta of comparable firms/projects is 1.2. The company is subject to a 35% corporate tax rate and you can assume the risk-free rate and market risk premium are 4% and 5%, respectively. Find the market value of the equity in the project and the project-specific WACC. What is the implication of the market value of equity?
Los Angeles Lumber Company is considering a project with a cost of $1,000 initially, and inflows of $300 at the end of years 1-5. LALC's cost of capital is 12 p
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