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Question 1: CleanSweep has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $4.00 per share. It also has $2 million in face value of debt that trades at 85% of par.
Required:
a. Part A: What is the market value of the firms equity, debt and the firm? firm value= MV of equity + MV of debt
b. Part B: CleanSweep's CEO, Bill O'Brien, is curious to know what the firm's cost of capital is. Bill thinks the firm's cost of equity is 19%. According to CAPM estimates, the firm's beta is 1.5, the risk-free interest rate is 4% and the expected return on the market portfolio is 10%? The firm's debt is currently yielding 5% and it's tax rate is 30%. What is CleanSweep's WACC? (If you were unable to calculate Part A, use an equal 50%/50% debt to equity ratio (-1 point)).
c. Part C: Bill O'Brien is planning a new capital project. He expects the project to have the same level of risk as the company overall. The project will cost $9M and will return annual cashflows of $1M forever. Should Bill O'Brien go ahead with this project? What is the projected NPV?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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