Common stock of the company Mandela, has a beta of 1.3. Treasury Bills provide a return of

Question:

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?

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...