What is the cost of equity of mininc

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Reference no: EM133325785

Capital Budgeting without and with Debt Financing

LargeInc is a conglomerate planning entering into a new industry.

There is currently one firm in this new industry, MinInc.

MinInc has a debt equity ratio of 1/3. The EBIT of MinInc is expected to be $80m even year and lasts forever. MinInc's total value (debt and equity) is $200m.

Both LargeInc and MinInc can borrow at the riskfree rate of 10%. The corporate tax rate for both firms is 50%.

Question 1: What is the cost of equity of MinInc?

Question 2: Suppose LargeInc is planning to make $100m of initial investment for the new business and expects to earn $40m of EBIT every year forever. Assume the depreciation is equal to 0. If the initial investment is fully financed with equity only, what is the NPV of the project?

Question 3: Instead of fully financing with equity, LargeInc decides to borrow $100m non-amortizing loan at 10% interest rate for 5 years. What is the NPV of the project?

Reference no: EM133325785

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