Ecco, Inc. Is a firm in the sustainable hotel industry. You are hired to advise the...

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Ecco, Inc. Is a firm in the sustainable hotel industry. You are hired to advise the CEO on new investment opportunities. Current market conditions are: all firms can attract debt at the risk-free rate of 3%, and the market risk premium amounts to 4%. Ecco's market value of debt equals 100 million euro, the same as its market value of equity. The firm is in the 35% tax bracket. Its equity beta amounts to 0.80. The firm is now considering two investment projects: Project X: is the opening of a new hotel in Mallorca. This project has the same business and the same financial risk as the rest of the firm. Project Y: is the launch of a new booking app for the Apple Watch and is outside the scope of its current activities. This project will be financed with the same mix of debt and equity as the rest of Ecco. App developing firms typically have a debt/equity ratio of 0.60 ( in market values), are in the 20% tax bracket, and have an equity beta of 1.50 1) Calculate the discount rate of project X needed in the NPV model. 2) Calculate the discount rate of project Y needed in the NPV model 3) Would your answer to question 2) if Ecco would be all equity financed? Calculate if necessary. Ecco, Inc. Is a firm in the sustainable hotel industry. You are hired to advise the CEO on new investment opportunities. Current market conditions are: all firms can attract debt at the risk-free rate of 3%, and the market risk premium amounts to 4%. Ecco's market value of debt equals 100 million euro, the same as its market value of equity. The firm is in the 35% tax bracket. Its equity beta amounts to 0.80. The firm is now considering two investment projects: Project X: is the opening of a new hotel in Mallorca. This project has the same business and the same financial risk as the rest of the firm. Project Y: is the launch of a new booking app for the Apple Watch and is outside the scope of its current activities. This project will be financed with the same mix of debt and equity as the rest of Ecco. App developing firms typically have a debt/equity ratio of 0.60 ( in market values), are in the 20% tax bracket, and have an equity beta of 1.50 1) Calculate the discount rate of project X needed in the NPV model. 2) Calculate the discount rate of project Y needed in the NPV model 3) Would your answer to question 2) if Ecco would be all equity financed? Calculate if necessary.

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1 Calculation of the discount rate of project X needed in the NPV model Project X has the same busin... View the full answer