Phil Inn is CEO of the hotel management business, Inns Across Canada. He needs to determine...
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Phil Inn is CEO of the hotel management business, Inns Across Canada. He needs to determine the required rate of return for investment projects, and has the following information: Debt Bank Debt Equity Market Other The firm's debt consists of 2,000,000 debentures, each selling for $900 with a yield to maturity of 6.4%. There is a bank loan of $20 million; the current rate on commercial loans is 4.8%. The firm's beta is 2.0; the stock sells for $20.00 per share and there are 10,000,000 shares outstanding; T-bills are yielding 1%, and the Market Risk Premium is 7.5%. The corporate tax rate is 25%. Required: (a) Compute the required rate of return for Inns Across Canada. (2 marks) (b) Assume that flotation cost of new debt is 3%, and new equity is 6%. There are no floatation costs on the bank loan. What is required rate of return for the firm is new capital must be raised? (2 marks) (c) Inns Across Canada forecasts profit this coming year of $100 million. The capital structure in part (a) is considered optional. Notwithstanding your answer in parts (a) or (b), assume the firm's WACC is 8%. Given the following list of potential projects, which projects should be chosen, and how much dollars will equity investors require on a yearly basis based on the projects chosen? marks) Project A B C D E Cost (Co) $40MM $60MM $30MM $20MM $50MM IRR% 6.5% 7.5% 8.3% 8.5% 8.7% Phil Inn is CEO of the hotel management business, Inns Across Canada. He needs to determine the required rate of return for investment projects, and has the following information: Debt Bank Debt Equity Market Other The firm's debt consists of 2,000,000 debentures, each selling for $900 with a yield to maturity of 6.4%. There is a bank loan of $20 million; the current rate on commercial loans is 4.8%. The firm's beta is 2.0; the stock sells for $20.00 per share and there are 10,000,000 shares outstanding; T-bills are yielding 1%, and the Market Risk Premium is 7.5%. The corporate tax rate is 25%. Required: (a) Compute the required rate of return for Inns Across Canada. (2 marks) (b) Assume that flotation cost of new debt is 3%, and new equity is 6%. There are no floatation costs on the bank loan. What is required rate of return for the firm is new capital must be raised? (2 marks) (c) Inns Across Canada forecasts profit this coming year of $100 million. The capital structure in part (a) is considered optional. Notwithstanding your answer in parts (a) or (b), assume the firm's WACC is 8%. Given the following list of potential projects, which projects should be chosen, and how much dollars will equity investors require on a yearly basis based on the projects chosen? marks) Project A B C D E Cost (Co) $40MM $60MM $30MM $20MM $50MM IRR% 6.5% 7.5% 8.3% 8.5% 8.7%
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a To compute the required rate of return for Inns Across Canada we need to calculate the weighted average cost of capital WACC WACC is the average rate of return required by both debt and equity inves... View the full answer
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