Discount Limited is considering an investment to diversify into a different industry. It has established the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Discount Limited is considering an investment to diversify into a different industry. It has established the following information: a) The Asset Beta for companies in the industry is 0.95. b) The mean of the Equity Betas of quoted companies in the industry is 1.25. c) Equity market risk premium = 5%. d) Discount Limited has a gearing ratio of 12%, measured as the market value of debt to the market value of debt plus the market value of equity. e) f) The risk-free rate of interest is 2.5% per year on three-year government bonds and 3.8% per year on ten-year government bonds. The rate of taxation is 25%. g) The company intends to apply a discount rate to the estimated cash flows of the project that is equal to the cost of equity plus a premium of 3%. Required What cost of capital should be applied to this proposed investment? (5 marks) Discount Limited is considering an investment to diversify into a different industry. It has established the following information: a) The Asset Beta for companies in the industry is 0.95. b) The mean of the Equity Betas of quoted companies in the industry is 1.25. c) Equity market risk premium = 5%. d) Discount Limited has a gearing ratio of 12%, measured as the market value of debt to the market value of debt plus the market value of equity. e) f) The risk-free rate of interest is 2.5% per year on three-year government bonds and 3.8% per year on ten-year government bonds. The rate of taxation is 25%. g) The company intends to apply a discount rate to the estimated cash flows of the project that is equal to the cost of equity plus a premium of 3%. Required What cost of capital should be applied to this proposed investment? (5 marks)
Expert Answer:
Answer rating: 100% (QA)
To determine the cost of capital for the proposed investment we need to calculate the cost of equity ... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
This case study on project evaluation is applicable for beginning courses in corporate finance or finance strategy. Two alternative investment options are available to evaluate. Challenges are...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Jason is unhappy with the performance of his mutual fund. He sells his shares in the current fund and repurchases shares in a similar fund with the same firm. This transaction may not be a taxable...
-
Suppose that the density of seawater, p = p (z), varies with the depth below the surface. (a) Show that the hydrostatic pressure is governed by the differential equation where is the acceleration due...
-
A bridge truss extends 100 m across a river (Fig. P12.69). The structure is free to slide horizontally to permit thermal expansion. The structural components are connected by pin joints, and the...
-
Clarmont Resources has the following account balances at October 31, 2010. The inventory balance was determined using FIFO. Clarmont Resources has determined that the replacement cost (current market...
-
The stockholders' equity section of Warm Ways Inc.'s balance sheet at January 1, 2017, shows: Preferred stock, $100 par value, 10% dividend, 50,000 shares issued and...
-
Question 2 (2 points): Texarkana decided to retire its bonds, and made a gain on retirement of these bonds of $5,270. These bonds had a face value of $100,000, a 'premium on bond payable' at the...
-
Heat is transferred from water to air through a brass wall (k = 54 W/(m K)). The addition of rectangular brass fins, 0.08 cm thick and 2.5 cm long, spaced 1.25 cm apart, is contemplated. Assuming a...
-
Think about the ways you typically respond to conflict. Do you tend to rely on one or two of the four responses we discussed (exit, voice, loyalty, neglect)? Are your response tendencies consistent...
-
K Subtract as indicated. x+2x x-4 x-x-6x-x-6 x + 2x x-4 2 - x-x-6 x-x-6 (Simplify the answer. Leave the result in factored form.)
-
Let A be an array of n integers. The frequency of a in A is the number of times a appears in A . For instance, if A = [ 0 , 2 , 0 , 1 , 3 , 3 , 1 , 0 , 5 ] , elements { 2 , 5 } have frequency one,...
-
A 4 kg box is moving at 6 m/s NORTH. It strikes a 7 kg box that is moving WEST at 2 m/s. The box's have a completely inelastic (stick together) collision. The speed of the combined object after the...
-
Suppose that the energy a wind turbine (WT) can produce before it fails for repair is exponentially distributed with an average value of 100 MWh (note that: IMWh-10 Watt-hour, for instance a 50W PC...
-
Evaluate the expression. 5.(-6)0
-
Are leaders and managers expected to have a balance of both leadership and manager capabilities to do a good job, or do leaders just need leadership ability and managers just need managerial...
-
d) For die casting processes: 1. What are the most common metals processed using die casting and discuss why other metals are not commonly die casted? 2. Which die casting machines usually have a...
-
Mo's Delicious Burgers Inc. sells food to university cafeterias for $15 a box. The fixed costs of this operation are $80,000, while the variable cost per box is $10. a. What is the break-even point...
-
Recently, Hertz Pain Relievers bought a massage machine that provided a return of 8 percent. It was financed by debt costing 7 percent. In August, Mr. Hertz came up with a heating compound that had a...
-
Ellis Electronics Company's actual sales and purchases for April and May are shown here, along with forecasted sales and purchases for June through September. The company makes 10 percent of its...
-
Which amortization method's amounts are not computed based on time? a. Straight-line b. Units-of-production (UOP) c. Double-declining-balance (DDB) d. All are based on time
-
Vasdev Company paid \(\$ 1,100,000\) to acquire Gentech Systems. Gentech's assets had a market value of \(\$ 1,800,000\), and its liabilities were \(\$ 800,000\). In recording the acquisition, Vasdev...
-
Phillipines Trucking bought three used trucks for \(\$ 60,000\). An independent appraisal of the trucks produced the following figures: Phillipines Trucking paid \(\$ 21,000\) in cash and signed a...
Study smarter with the SolutionInn App