Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for...

   

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Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a pension plan managing a global large-cap fund internally. Sandell is concerned about one of the fund's larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in 80 countries, with the previous year's global revenues at €5.6 billion. Recently, Kruspa's CFO announced plans for expansion into Trutan, a country with a developing economy. Sandell worries that this expansion will change the company's risk profile and wonders if he should recommend a sale of the position. Sandell provides Knudsen with the basic information. Kruspa's global annual free cash flow to the firm is €500 million and earnings are €400 million. Sandell estimates that cash flow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspa's after-tax free cash flow to the firm on the Trutan project for next three years is, respectively, €48 million, €52 million, and €54.4 million. Kruspa recently announced a dividend of €4.00 per share of stock. For the initial analysis, Sandell requests that Knudsen ignore possible currency fluctuations. He expects the Trutanese plant to sell only to customers within Trutan for the first three years. Knudsen is asked to evaluate Kruspa's planned financing of the required €100 million with a €80 million public offering of 10-year debt in Sweden and the remainder with an equity offering. Additional information: Equity risk premium, Sweden Risk-free rate of interest. Sweden Industry debt-to-equity ratio Market value of Kruspa's debt Market value of Kruspa's equity Kruspa's equity beta Kruspa's before-tax cost of debt Trutan credit A2 country risk premium Corporate tax rate Interest payments each year 4.82 percent 4.25 percent 0.3 €900 million €24 billion 13 9.25 percent 1.88 percent 37.5 percent Level 13 Using the capital asset pricing model, Kruspa's cost of equity capital for its typi- cal project is closest to: A 7.62 percent. B 10.52 percent. C 12.40 percent. 14 Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the Trutan project. This weighted average cost of capital (WACC) is closest to: A 7.65 percent. B 9.23 percent. C 10.17 percent. 15 In his estimation of the project's cost of capital. Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the Trutan project is closest to: A 1.053. B 1.110. C 1.327. 16 Sandell is performing a sensitivity analysis of the effect of the new project on the company's cost of capital. If the Trutan project has the same asset risk as Kruspa, the estimated project beta for the Trutan project, if it is financed 80 percent with debt, is closest to: A 1.300. B 2.635. C 3.686. 17 As part of the sensitivity analysis of the effect of the new project on the compa- ny's cost of capital, Sandell is estimating the cost of equity of the Trutan project considering that the Trutan project requires a country equity premium to capture the risk of the project. The cost of equity for the project in this case is closest to: A 10.52 percent. B 19.91 percent. (28.95 percent. 18 In his report, Sandell would like to discuss the sensitivity of the project's net present value to the estimation of the cost of equity. The Trutan project's net present value calculated using the equity beta without and with the country risk premium are, respectively: A €26 million and €24 million. B €28 million and €25 million. C €30 million and €27 million. Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a pension plan managing a global large-cap fund internally. Sandell is concerned about one of the fund's larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in 80 countries, with the previous year's global revenues at €5.6 billion. Recently, Kruspa's CFO announced plans for expansion into Trutan, a country with a developing economy. Sandell worries that this expansion will change the company's risk profile and wonders if he should recommend a sale of the position. Sandell provides Knudsen with the basic information. Kruspa's global annual free cash flow to the firm is €500 million and earnings are €400 million. Sandell estimates that cash flow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspa's after-tax free cash flow to the firm on the Trutan project for next three years is, respectively, €48 million, €52 million, and €54.4 million. Kruspa recently announced a dividend of €4.00 per share of stock. For the initial analysis, Sandell requests that Knudsen ignore possible currency fluctuations. He expects the Trutanese plant to sell only to customers within Trutan for the first three years. Knudsen is asked to evaluate Kruspa's planned financing of the required €100 million with a €80 million public offering of 10-year debt in Sweden and the remainder with an equity offering. Additional information: Equity risk premium, Sweden Risk-free rate of interest. Sweden Industry debt-to-equity ratio Market value of Kruspa's debt Market value of Kruspa's equity Kruspa's equity beta Kruspa's before-tax cost of debt Trutan credit A2 country risk premium Corporate tax rate Interest payments each year 4.82 percent 4.25 percent 0.3 €900 million €24 billion 13 9.25 percent 1.88 percent 37.5 percent Level 13 Using the capital asset pricing model, Kruspa's cost of equity capital for its typi- cal project is closest to: A 7.62 percent. B 10.52 percent. C 12.40 percent. 14 Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the Trutan project. This weighted average cost of capital (WACC) is closest to: A 7.65 percent. B 9.23 percent. C 10.17 percent. 15 In his estimation of the project's cost of capital. Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the Trutan project is closest to: A 1.053. B 1.110. C 1.327. 16 Sandell is performing a sensitivity analysis of the effect of the new project on the company's cost of capital. If the Trutan project has the same asset risk as Kruspa, the estimated project beta for the Trutan project, if it is financed 80 percent with debt, is closest to: A 1.300. B 2.635. C 3.686. 17 As part of the sensitivity analysis of the effect of the new project on the compa- ny's cost of capital, Sandell is estimating the cost of equity of the Trutan project considering that the Trutan project requires a country equity premium to capture the risk of the project. The cost of equity for the project in this case is closest to: A 10.52 percent. B 19.91 percent. (28.95 percent. 18 In his report, Sandell would like to discuss the sensitivity of the project's net present value to the estimation of the cost of equity. The Trutan project's net present value calculated using the equity beta without and with the country risk premium are, respectively: A €26 million and €24 million. B €28 million and €25 million. C €30 million and €27 million.

Answer rating: 100% (QA)

ANSWERS 13 Using the CAPM model Re Rf RM Rf Where Rf riskfree rate Sweden 425 RM Rf equity risk ... View the full answer