Firm has twice as much systemic risk as the market portfolio

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Reference no: EM131845026

Laval Inc. is considering a project that requires an initial investment of $20 million and promises to generate an annual after-tax cash flow of $2 million perpetually. This firm is only financed by common shares and debt. In its capital structure it has a debt-to-equity ratio of 2/3, and it wants to maintain this capital structure in future. It has bonds outstanding with a coupon rate of 6% (with semiannual coupon payment), and these bonds mature in 8 years. The bonds are currently selling at 95% of their par value. Current market risk premium is 6% and risk free rate is 3%. The firm has twice as much systemic risk as the market portfolio. The firm’s tax rate is 35%. The firm does not have any internal capital for this project. Floatation costs for stocks and bonds are 6% and 2%, respectively, for this firm. Given the information provided. Should the firm take the project? Show your calculation and make your conclusion

Reference no: EM131845026

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