Blue Angel Ltd, a private firm in the holiday gift industry, is considering a new project. The
Question:
Blue Angel Ltd, a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of 0.40, but the industry target debt–equity ratio is 0.35. The industry average beta is 1.2. The market risk premium is 8 per cent, and the risk-free rate is 7 per cent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 28 per cent. The project requires an initial outlay of £450,000 and is expected to result in a £75,000 cash inflow at the end of the first year. The project will be financed at Blue Angel’s target debt–
equity ratio. Annual cash flows from the project will grow at a constant rate of 5 per cent until the end of the fifth year and remain constant forever thereafter. Should Blue Angel invest in the project?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe