Ekia, Inc. is large, all-equity financed, Norwegian firm that manufactures and sells stylish yet affordable modern...

 

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Ekia, Inc. is large, all-equity financed, Norwegian firm that manufactures and sells stylish yet affordable modern home furnishings. It is planning to make an investment that will allow it to produce and sell a new line of outdoor patio furniture. This project will also be all-equity financed. Suppose that you have been hired to determine the appropriate cost of capital for valuing the cash flows of this project. While Ekia does not currently operate in the patio furniture market, you have identified one competitor in this market segment, PatioWorld, Inc., and have compiled its details here, along with other market data: PatioWorld, Inc. - Selected Financial & Market Data Current price per share: $50 Shares outstanding: 2m Leverage ratio (D/ (D+E)): 0.2 Current debt cost of capital, rp: 6.3% (EAR) Equity beta: 1.3 Current Treasury yield: 3% (EAR) Historical average Treasury yield (prev. 5 yrs.): 3.5% (EAR) Current investment-grade corporate bond yield 5% (EAR) Historical average investment-grade corporate bond yield (prev. 5 yrs.): 4% (EAR) Expected market risk premium (forward-looking): 6% (EAR) Suppose that the CAPM holds for all assets in the economy. Finally, suppose that there are no corporate taxes or other frictions. What is the appropriate cost of capital to use when discounting the expected cash flows for Ekia's patio furniture expansion? Please report your answer as a percent not a decimal. For instance, if you determine that the cost of capital is 7.43%, please enter 7.43 not 0.0743. Ekia, Inc. is large, all-equity financed, Norwegian firm that manufactures and sells stylish yet affordable modern home furnishings. It is planning to make an investment that will allow it to produce and sell a new line of outdoor patio furniture. This project will also be all-equity financed. Suppose that you have been hired to determine the appropriate cost of capital for valuing the cash flows of this project. While Ekia does not currently operate in the patio furniture market, you have identified one competitor in this market segment, PatioWorld, Inc., and have compiled its details here, along with other market data: PatioWorld, Inc. - Selected Financial & Market Data Current price per share: $50 Shares outstanding: 2m Leverage ratio (D/ (D+E)): 0.2 Current debt cost of capital, rp: 6.3% (EAR) Equity beta: 1.3 Current Treasury yield: 3% (EAR) Historical average Treasury yield (prev. 5 yrs.): 3.5% (EAR) Current investment-grade corporate bond yield 5% (EAR) Historical average investment-grade corporate bond yield (prev. 5 yrs.): 4% (EAR) Expected market risk premium (forward-looking): 6% (EAR) Suppose that the CAPM holds for all assets in the economy. Finally, suppose that there are no corporate taxes or other frictions. What is the appropriate cost of capital to use when discounting the expected cash flows for Ekia's patio furniture expansion? Please report your answer as a percent not a decimal. For instance, if you determine that the cost of capital is 7.43%, please enter 7.43 not 0.0743.

Answer rating: 100% (QA)

To calculate the appropriate cost of capital for Ekias patio furniture expansion we can use the CAPM ... View the full answer