Solution-Unlevered return on equity of the new project

Unlevered return on equity of the new project

Reference no: EM133069986

Company A has a debt of $25,000,000 while its equity is $115,000,000. The beta of A's levered equity is 0.95 and the company keeps a constant debt-to-equity ratio. Company A's cost of debt is 4.35% and it bears no systematic risk (beta of debt = 0). The expected return of the market portfolio is 9%.

In the near future Company B is starting a new project with a life of 5 years, with asset similar to the assets of Company A. Company B will need to acquire new fixed assets for $12,450,000 in order to start the project. These assets will be depreciated straight-line through the life of the project. The CFO of the company has chosen to raise 1/3 of the necessary funds for the new project as debt, and 2/3 as equity. Moreover, the debt level for the project will be kept constant through its life, and it bears no systematic risk (debt beta = 0). The corporate tax rate is 24%.

What is the unlevered return on equity of the new project of Company B?

Reference no: EM133069986

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Unlevered return on equity of the new project

Reference no: EM133069986

Reference no: EM133069986

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