A company is considering a new water bottling plant. Business plan forecasts an internal rate of return
Question:
A company is considering a new water bottling plant. Business plan forecasts an internal rate of return of 14 % on the investment. The beta of similar projects is 1.3. the risk free rate is 4 % and the market risk premium is estimated at 8 %. What is the hurdle for the project? What does this mean for the project: should it or should it not be undertaken? (5 marks)
Equity holders’ investment in the firm is K100 million, and the beta of the equity is 0.6. if the T-bill rate 6 %, and the market risk premium is 8 %. What would be a fair annual profit? (4 marks)
Stock XYZ has an expected return of 12 %, and risk of β and = 1.0. Stock ABC is expected to return 13 % with a beta of 1.5. The markets expected return is 11 % and risk free rate is 5 %. Which stock is a better buy? What is the alpha of each stock? Plot the SML and the two stocks and show the alphas of each on the graph? (5 marks)
The risk free rate is 8 % and the expected return on the market portfolio is 16 %. A firm is considering a project with an estimated beta of 1.3. What is the required rate of return on the project? If the IRR is of the project is 19 %, what is the project alpha? (4 marks)
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford