What is the appropriate discount rate for your project?

Reference no: EM13293220

You are in the process of evaluating a project. On the basis of the riskiness of the future revenue stream from this project, you reckon that Daylink Corp., a firm whose stock is traded on the NYSE, is the appropriate pure play firm. You estimate that the beta of Daylink's stock to be 2 and its expected return to be 18 percent. The riskfree rate is 6 percent. You find out the following information about Daylink's capital structure: It has 100,000 bonds with face value of $1,000 outstanding and that these bonds are trading at $950 per bond. The firm has 10 million common stock shares outstanding. These shares have a par value of $5 per share and the firm has $40 million in retained earnings. The shares are trading on the NYSE at $19 per share. Your firm has a Debt/Equity ratio of 0.4. Assume that your project and Daylink use similar technology and that all debt is riskfree. What is the appropriate discount rate for your project? What would be the required rate of return of your shareholders from this project?

Reference no: EM13293220

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