Question: Common stock of the company Mandela has a beta of

Common stock of the company Mandela, has a beta of 1.3. Treasury Bills provide a return of 4% and the market risk premium is 16%. Suppose Mandela, total value is composed of 60% equity and 40% debt (by market value). Debt yields of 8%. There are no shares of preferred stock in circulation.
i) Find the cost of equity capital for Mandela
ii) If Mandela has a total value, V of $1,000,000,000. If there are 15,000,000 shares of Mandela stock outstanding, what is the current price of a share of Mandela equity?
iii) What is the WACC if the firm faces an average tax rate of 40% .
iv) Assuming Mandela is considering a project with an IRR of 12%, should it accept the project? Why or why not?
v) Assuming Mandela is considering a product line that will provide expected new net cash flows of $100,000 per year for 4 years. What is the maximum amount you think Mandela would be willing to pay for this new product line today?

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  • CreatedJuly 29, 2013
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