b. Suppose ABC is considering the possibility of opening a luxury department store in New York...
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b. Suppose ABC is considering the possibility of opening a luxury department store in New York on 5th avenue. It plans to finance this new project equally with debt and equity. The cost of the debt for the new project is 6%. ABC Corporation's CFO asked his associates to provide him with some financial information. Here is some of the information he has received. Firm Name Industry D/E ratio Equity Beta Cost of Debt Saks Fifth Avenue Neiman Marcus Luxury Department Store Luxury Department Store Laptop Production 1 1.8 5% 1.25 2 6% Apple 0.75 1.4 7% What discount rate should ABC use to discount the cash flows from its luxury department store project? (10 points) Q5. Project Cost of Capital (20 points) ABC Corporation is a publicly traded company that specialized in laptop production. The company's debt-to-equity ratio of 1/4 and it plans to maintain the same debt-to-equity ratio indefinitely. ABC's debt is riskless, and its equity beta is 1.5. Risk free rate is 5% and market risk premium is also 5%. The corporate tax rate for ABC Corporation is 40%. a. Suppose that ABC Corporation is contemplating whether to start a new laptop production line. This project will have the same capital structure as the firm. The debt for the new project is riskless. What discount rate should ABC use to discount the cash flows from its laptop production project? (10 points) b. Suppose ABC is considering the possibility of opening a luxury department store in New York on 5th avenue. It plans to finance this new project equally with debt and equity. The cost of the debt for the new project is 6%. ABC Corporation's CFO asked his associates to provide him with some financial information. Here is some of the information he has received. Firm Name Industry D/E ratio Equity Beta Cost of Debt Saks Fifth Avenue Neiman Marcus Luxury Department Store Luxury Department Store Laptop Production 1 1.8 5% 1.25 2 6% Apple 0.75 1.4 7% What discount rate should ABC use to discount the cash flows from its luxury department store project? (10 points) Q5. Project Cost of Capital (20 points) ABC Corporation is a publicly traded company that specialized in laptop production. The company's debt-to-equity ratio of 1/4 and it plans to maintain the same debt-to-equity ratio indefinitely. ABC's debt is riskless, and its equity beta is 1.5. Risk free rate is 5% and market risk premium is also 5%. The corporate tax rate for ABC Corporation is 40%. a. Suppose that ABC Corporation is contemplating whether to start a new laptop production line. This project will have the same capital structure as the firm. The debt for the new project is riskless. What discount rate should ABC use to discount the cash flows from its laptop production project? (10 points)
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