A the end of period 0, EUSTRO Industries has the following characteristics: Enterprise value estimated at $100
Question:
A the end of period 0, EUSTRO Industries has the following characteristics: Enterprise value
estimated at $100 million; Cost of debt (rD) = 10%; Cost of equity (rE) = 15%; Leverage ratio
(D/E) = 1. The risk free rate (rF) within the economy is 5%, the expected return on the market
portfolio (rM) is 12% and the tax rate is 35%.
a) Compute the WACC of the company (2 points).
b) What is the unlevered beta (U) of the firm? (5 points)
c) The firm is considering a new investment project which has the same operating risk (asset
risk) as the company. The financing of the project will not alter the leverage of the firm (its
D/E ratio). The new project has the following expected free cash flow:
Period FCF (in $ million)
0 -100
1 12
2 12
3 12
4 12
5 112
(Indication: the FCF of period 0 is the investment cash flow, and the cash flow of period 5
includes already the terminal value)
Could you help the CFO in estimating the Enterprise Value of EUSTRO Industries after the
implementation of this new investment project? (3 points)
d) A young assistant, who has followed an Investment Banking course recently, brings to the
attention of the CFO that the economic (asset) risk of the project might be slightly different
from the economic (asset) risk of the firm. After doing some estimation using a sample of
monosegment industry firms, she comes up with an unlevered Beta in the range of 0.95
and 1.15 for this project. What is the Enterprise Value range implied by this min and max
unlevered Beta? (5 points)
e) What is the value of the unlevered beta (U) which leads to a breakeven situation? (5
points)