Forton plc. is considering opening a restaurant in Lancaster. The project requires an initial investment of 400,000
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Question:
i) What is the level of sales that the project generates each year? (6 marks)
ii) Assume that 50% of the initial cash outflow is financed with debt. Calculate the adjustedpresent-value. Should the firm implement the project under the new assumption? (5 marks)
iii) Assume that, as in (ii), 50% of the initial cash outflow is financed with debt. Use the flow-toequity approach to calculate the net present value of the project. Should the firm implement the project?
iv) Assume that, as in (ii) and (iii), 50% of the initial cash outflow is financed with debt. Use the weighted-average-cost-of-capital approach to calculate the net present value of the project. Should the firm implement the project? (6 marks)
v) What is the level of debt and equity that makes the firm indifferent between accepting and rejecting the project? (4 marks)
b) What factors determine the beta of the equity? How do you calculate beta in practice and what are the pitfalls you may face in this calculation? (12 marks)
c) Beta plc. has decided to borrow money by issuing callable bonds with annual coupon payments. The bonds are perpetual, have a face value of £1,000 and are callable at £1,250. One-year interest rates are 6%. There is 60% probability that long-term interest rates one year form today will be 9%, and 40% probability that long-term interest rates will be 4%. Assume that if interest rates fall the bonds will be called (at year 1). What coupon rate should the bonds have in order to sell at par value?
Related Book For
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
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