The project is somewhat riskier than a typical project for DH, primarily because the plant is being
Question:
The project is somewhat riskier than a typical project for DH, primarily because the plant is being located overseas. Therefore the project will increase the market risk of the firm. Management estimates the investors would require an additional 2% return, for compensation. Calculate the appropriate discount rate using a subjective approach to handling the added risk.
a) Calculate the total market value of each of the capital components:
---> Debt:
Preferred Stock
Common Equity
b) calculate the weighted average cost of capital.
c) Use the corporate valuation model to check your answer to WACC. assume that FCF Will grow at the same rate as The Firm. NOTE: you will have to work backwards through the model to get WACC.
d) what discount rate should DH use?
An introduction to management science quantitative approaches to decision making
ISBN: 978-1111532222
13th edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey Cam