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You are in the midst of valuing a large, risky investment in an offshore windfarm. You are faced with two options: using generic turbines or using new-technology turbines. Building the wind farm with generic technology is cheaper: a generic wind farm costs 50M while a new technology wind farm has a price tag of 80M. Either option will create $3M in FCF next year that will grow at a rate of 3% in perpetuity. To evaluate your project, you find two comparable companies. Your generic technology comparable has an expected equity return of 8%, a constant leverage ratio of 50%, debt currently yielding 12%, and a credit rating of BB. You calculate the unlevered cost of capital of the generic technology comp to be 7%. Your new technology comparable has an expected equity return of 9%, a constant leverage ratio (D/V) of 40%, a yield of 23%, and a credit rating of B+. Additionally, since the technology is completely new it is less easy to sell in the aftermarket, and so debtholders will only recover 45 cents on the dollar in case of default. The average default probability of firms with a BB rating is 20% and the equivalent default probability for firms with a B+ rating is 30%. You are extremely averse to taking on any debt and so, regardless of your choice of technology, you plan on financing your windfarm with no debt whatsoever. Answer the following questions: (a) What is the expected return on debt capital for the new technology comp? (b) What is the unlevered cost of capital for the new technology comp? (c) Which technology would you choose for your windfarm?
Assume the company's maket beta equals 0.8, the risk free rate is 5%, and th emarket return equals 8%, compute the companies cost of capital? What are the most important financial variables to be managed for the share price to move toward equilibrium..
A below average gross profit margin may result from ?
Explain if the source of cash sustainable, and list any outstanding variances you have noticed below:3-4 variances required and now in the space provided, list the corrective measures you would implement and why.
Jenson Computers has 850 computers that are no longer useful. The original cost was $600,000. The computers could be upgraded for $195,000 and sold for $728,000. Or, they could be sold as is for $100,000. What is their sunk cost?
Suppose the Federal Reserve raises shortterm interest rates, an action that is likely to reduce aggregate output temporarily.- Describe the various effects on the profits of commercial banks.
The return on Simon Entertainment stock in the past eight months has been as follows: 8%, 4%, 16%, -10%, 26%, 22%, 1%, -55%. From this information, estimate the beta of Simon stock.
You are compiling the 10 year history of a company using the wall st journal on microfilm, and you know that stock splits are a purely accounting phenomenon that do not directly affect shareholder wealth. Why do you still need stock split information..
Assume that exactly five years ago I borrowed $417,000. My loan has an interest rate of 4.25% and the term of the loan is 30 years (with required payments to be made every month). If I made every required payment on time for the first 60 months of th..
A 6.35 percent coupon bond with fifteen years left to maturity is priced to offer a 7.7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. What is the change in price the bond will experience in dollar..
Pardon Me, Inc., recently issued new securities to finance a new TV show. The project cost $13.8 million, and the company paid $705,000 in flotation costs. In addition, the equity issued had a flotation cost of 6.8 percent of the amount raised, where..
Assume that you are nearing graduation and have applied for a job with a local bank. What is the present value of the following uneven cash flow stream −$50, $100, $75, and $50 at the end of Years 0 through 3? The appropriate interest rate is 10%, co..
Is Hannah behaving in a professional manner? If not, what could she have done differently?
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